“It was not so very long ago that people thought that semiconductors were part-time orchestra leaders and microchips were very small snack foods.” ~ Geraldine Ferraro
Would you believe me if I told you that the most valuable thing in this world was a microchip 10,000 times smaller than a strand of hair?
Well until recently, probably not.
But after diving into the semiconductor industry at large, and learning how much influence these tiny chips have on society, my opinion changed for the better.
To put it lightly, semiconductor chips are the foundation of modern society and the essence of our digital world.
Without them, our technology would be primitive to what is today, and we humans would be forced to resolve things on our own.
Can you imagine having to walk to work, hand wash dishes, or send texts via carrier pigeon?!
The thought sends shivers down my spine. 🥶
But how can a microchip, that is practically invisible, be so important?
In its simplest form, a semiconductor chip controls the flow of electricity in all electronic devices, which allows them to perform various tasks.
Within the semiconductor, millions of transistors, or lines of code, inform the device when it should activate or lay idle.
Another way to think of it is like a million light switches that turn on and off; when a certain sequence is turned on, the device performs that specific task.
As the device becomes more complicated, say a self-driving car or supercomputer, the semiconductor requires more transistors to execute the desired task.
Today, the most advanced semiconductors possess more than 30 billion transistors on a single chip.
But enough of that scientific mumbo-jumbo, it is time to talk business.
In today’s newsletter, we explain:
🐂 why we are bullish on the semiconductor industry;
🌲 why the current trends are set to last;
🚀 and five small-cap semiconductor stocks with huge upside potential
🚨 If you enjoy our newsletter, please share this with a friend and subscribe so that we may deliver more value to our investment community!
The Semiconductor Industry at a Glance
The role of the semiconductor industry is growing increasingly important as the race for technological superiority ramps up across the world, and supply chain constraints, due to Covid-19 and geopolitical conflict, limit current productivity.
With demand surpassing 1.14 trillion chips per year or 128 per person, businesses and governments alike are looking to capitalize on this lucrative opportunity by investing billions into their domestic markets to become self-sufficient.
For example, the United States government recently passed the Chips and Science Act, which will boost American semiconductor manufacturing by offering over $52 billion in tax breaks and subsidies to companies wanting to operate in the American market.
That being said, the top players, as of right now, exist outside of the US market with Taiwan’s TSMC (TSM), and South Korea’s Samsung (SMSN.IL) being the biggest and most valuable by far; as of 2022, Taiwan manufactures 66% of the world’s semiconductor chips.
Overall, the global semiconductor market is valued at $573.44 billion in 2022 and is expected to reach $1,380.79 billion by 2029, according to Fortune Business Insights.
That is an impressive 12.2% compound annual growth rate.
Three Reasons to be Bullish on Semiconductor Stocks in 2022
📈 Semiconductors are deflationary by nature as the cost to produce them halves every two years, while the number of transistors/ computing power doubles in that same time (Moore’s Law).
📱 Demand for high-tech semiconductor chips is growing, and of increasing importance, as society trends toward greater digital dependence; for example, the average American will spend approx. 44 days on their phone in 2022.
💰 As mentioned earlier, governments are increasing investment in this area, with the United States leading the way by granting over $52 billion in subsidies to semiconductor firms.
Three Reasons to be Bearish on Semiconductor Stocks in 2022
🤬 The global chip shortage is expected to last until at least 2023; so far more than $500 billion worldwide has been missed in revenues over the past two years, with auto sales losing more than $210 billion in 2021 alone.
🎢 The semiconductor industry faces volatile boom and bust cycles where supply and demand vary greatly depending on the state of an economy.
💸 Semiconductor manufacturing facilities require major upfront investments, up to $15 to $20 billion per facility, and need constant maintenance if they want to stay ahead of the technological evolution; present technology becomes obsolete after 5 years.
How to find Hidden Gems in the Small Cap Market
Edge Investment’s strategy focuses on finding small-cap stocks that we can easily understand, are strong competitively, have an excellent management team, and are trading at a discount to their value.
To learn more, check out our in-depth article explaining our philosophy in detail at edgeinvestments.org
Top Five Small Cap Semiconductor Stocks to add to Your Watchlist
1. Photronics (Nasdaq: PLAB)
💰 Market Cap: $1.437 billion USD
💲 Price: $23.33 USD
🎭 YTD Change: +23.77%
⭐️ CEO: Dr. KangJyh Lee Ph.D.
Overview: Photronics is a pioneer in photomask manufacturing and technology. With over 50 years of experience, they deliver world-class products specialized for integrated circuits (IC) and flat panel displays (FPD).
Photronics’ Edge: With governments and businesses striving to source products domestically, Photronics is well positioned with a strong distribution network that has 11 manufacturing facilities worldwide.
2. Silicon Motion Technology (Nasdaq: SIMO)
💰 Market Cap: $2.658 billion USD
💲 Price: $80.43 USD
🎭 YTD Change: -15.36%
⭐️ CEO: Chia-Chang Kou
Overview: Silicon Motion Technology is a global leader in developing NAND flash controllers for high-performance storage solutions. Their controllers are widely used in data centers, personal computers, and commercial and industrial applications.
Silicon Motion’s Edge: Given the technological complexity of their products, Silicon Motion invests huge resources in training and developing their staff, meaning that they have a highly skilled workforce of over 1,400 employees.
3. Kulicke and Soffa Industries (Nasdaq: KLIC)
💰 Market Cap: $2.727 billion USD
💲 Price: $46.97 USD
🎭 YTD Change: +22.41%
⭐️ CEO: Dr. Fusen Ernie Chen
Overview: Kulicke and Soffa Industries is a leading provider of semiconductor and electronic assembly solutions. They pride themselves on creating next-generation interconnect solutions that enable performance improvements, power efficiency, and assembly excellence for semiconductor devices.
Kulicke and Soffa’s Edge: The automation of Kulicke and Soffa’s solutions allow them to easily scale up and down depending on levels of demand, meaning they can offer superb performance regardless of economic conditions.
4. Axcelis Technology (Nasdaq: ACLS)
💰 Market Cap: $2.292 billion USD
💲 Price: $69.38 USD
🎭 YTD Change: -6.95%
⭐️ CEO: Mary G. Puma
Overview: Axcelis Technologies designs, manufactures, and services processing equipment used in the manufacturing of semiconductor chips around the globe.
Axcelis’ Edge: The unmatched quality of Axcelis’ products enables their customers to achieve the highest purity, precision, and productivity of semiconductors, all while significantly reducing their costs, thus making them a valuable asset for any company in this market.
5. Himax Technology (Nasdaq: HIMX)
💰 Market Cap: $1.220 billion USD
💲 Price: $7.00 USD
🎭 YTD Change: -56.22%
⭐️ CEO: Jordan Wu
Overview: Himax Technologies is a fabless semiconductor solution provider that designs display imaging processing technologies; fabless means that Himax designs and sells the hardware, but does not manufacture it themselves. They are the worldwide market leader in display driver ICs which are used in a variety of electronic consumer devices.
Himax’s Edge: Himax is a cash flow king with over $350 million in free cash flow, meaning that they are well positioned for any economic turmoil, and can grow steadily without the need for additional financing.
🚨 Recently, we wrote an article exploring which asset is the better investment:
small cap ($300M to $2B) or large cap (>$10B) stocks
👆 If you’re curious, check it out by clicking the like above. 👆
🚨 If you enjoyed reading this newsletter, please be sure to share and subscribe so that you don’t miss out on our next “Small Cap Picks” newsletter where we decide who is the best small cap semiconductor stock.
This newsletter is written by Kevan Matheson, Founder & CEO of Edge Investments.
Before starting Edge, Kevan was an Institutional Analyst at RBC Global Asset Management, one of North America’s largest fund managers, with assets under management in excess of $400 billion.
After spending the majority of his career focused on large market capitalization public companies, Kevan became attracted to the risk/reward proposition of growth stocks and cryptocurrency.
In 2017 Kevan published a book on investing in cryptocurrency, where he speculated on the coming growth in NFTs and the underlying tokens that power their ecosystems.
Known in the growth stock community as Small Cap Kev, his current passion is finding stocks in disruptive industries like blockchain, psychedelic medicine, plant-based meat alternatives & much more.
This article was written in collaboration with Edge Investments’ analyst & writer, Declan O’Flaherty
Declan holds a Bachelor of Commerce from the University of Alberta and has over 2 years of experience investing in financial markets.
As a value investor, Declan embraces the lessons of Warren Buffett and his disciples when making investing decisions. With an emphasis on business fundamentals, his strategy focuses on finding stocks with excellent management, a competitive advantage, and those that are selling at discount to their real value.