Ride the AI Boom Through Semiconductors, Its Pick and Shovel Makers

When Nvidia, the US semiconductor company, hit a market capitalization of USD 1 trillion on 30 May 2023¹, it joined a small group of elite tech stocks such as Apple, Amazon, Microsoft and Amazon. Propelled by the fact that its advanced chips are essential for powering the new generation of AI-related tech – from ChatGPT to autonomous driving – its share price has tripled this year.

Yet other semiconductor companies, too, have much to gain from the AI fervor currently sweeping the business world. For example, the Asian chipmakers Taiwan Semiconductor Manufacturing Company and Samsung supply most of the world’s advanced chips.

For anyone looking to ride an investment megatrend, it’s often said that a lower risk way to do so is through the ‘pick and shovel makers’ – the companies that supply the companies making the end product. And for generative AI, this undoubtedly means semiconductor manufacturers.

While their share prices have already performed exceptionally well in 2023 (see price chart for the VanEck Semiconductor UCITS ETF), they offer a long-term way to invest in the theme without betting on the fortunes of a single AI platform.

Beyond AI, though, chips are the lifeblood of the digital transition. Without them there will be no highly automated cars, internet of things, supercomputers, quantum computing and automated factories of the future, not to speak of the new generation of AI chatbots. They are also key for decarbonisation, which rests on electrification and naturally involves semiconductors.

Turning to military and space equipment, surveillance, communication and navigation systems depend on chips, making them crucial for national security. They are vital components in satellites, enabling digital communication and Earth observation, including monitoring climate change.

Illustrating just how critical semiconductors have become, all three major economic blocs –Europe, the US and China – are pushing to become self-sufficient, aiming to curb dependence on foreign supply chains. This drive follows the Covid-19 pandemic exposing vulnerabilities in supply, as well as the emphasis on near-shoring in recent years. Notably, the typical semiconductor production process involves steps in more than five countries and three or more shipments across the globe.

Of course, this drive for self-sufficiency is likely to lead to greater chip manufacturing capacity, which could undermine profit margins. Yet demand is also likely to be strong, given not just the likely generative AI revolution but also the fact that chips are now essential for modern technology and even the electrification of the global economy over the next 25 years.

It's hard to argue that semiconductor stocks are cheap after 2023’s rally. But if anyone wants to invest in the AI boom, then its pick and shovel makers accessible through our ETF could offer a lower risk way of doing so. Investing in ETFs involves several risks. Please read the Prospectus and the KID before investing in an ETF.