After the explosive growth in semiconductor stocks over the past two years, some investors are now questioning whether this surge can be sustained.
Since the beginning of 2023, shares in Nvidia have increased over 850%, shares in Taiwan Semiconductor Manufacturing Company have jumped some 150%, meanwhile the broader NYSE semiconductor index has almost double over the same period.
Despite growing concerns about an unexpected drop in semiconductor demand – which is what happened after the dotcom bubble burst – it doesn’t look like demand will drop off anytime soon.
This is the view of Ryan Davies, senior portfolio manager at Manulife Investment Management who oversees a global semiconductor equity strategy for institutions in Japan.
“I get up every morning looking for negative data points, and I can’t find them,” he told FSA in an interview. “I’m trying to look for negative data points every day to say it is a bubble.”
Instead, Davies sees the opposite, and said this time could be different to prior bull cycles – pointing to the recent behaviour of the hyperscalers (Microsoft, Amazon, Alphabet, etc.).
Microsoft and Amazon have both signed deals to invest hundreds of millions into nuclear power to power their data centres – which Davies suggests is a positive sign for long-term semiconductor spend.
“The big cloud guys see things we don’t see, and they believe there’s going to be huge opportunities,” he said.
He believes that we are in the early innings of a fourth tectonic shift in computing: the shift from the mobile phone era to the parallel processing era.
“Each time there is a shift, the market gets multiples the size previously,” Davies said. “The mainframe era was 10,000 units a year. Mini computers was a million. PCs were hundreds of millions, mobile phones was north of a billion.”
“The reason for that is that the cost of compute just continues to go down and when that happens, you get more and more applications.”
“There’s a trillion dollars in data centre infrastructure built on legacy technologies,” he added. “In the next five-to-ten years, it’s all going to be ripped out and replaced, and the market’s going to get bigger.”
Opportunities beyond Nvidia
Nvidia has been one of the biggest beneficiaries of the recent boom in semiconductor demand on the back of AI computing needs. Despite its massive run-up, Davies still thinks the company will do well in 2025 and 2026.
The reason for its success is down to the superiority of its product, according to Davies. “Keep in mind, it’s not just a chip,” he said. “They sell systems. Its almost like a computer. if somebody else could compete with them, they would drive prices down, and nobody has been able to do it.”
“Their products are just that good,” he added. “They can process information so much quicker, the technology and the software on top of that to make it work, when you’re building solutions top of it. It’s just so much better than everybody else.”
Aside from Nvidia, there are lesser-known opportunities for investors in the semiconductor space, which is where Davies gets most excited.
He said: “The large cloud vendors use Nvidia, but they also buy chips from Broadcom. There’s a whole series of smaller mid-cap companies – I call them connectivity companies – that make specialised parts.”
“What’s happening is you’re starting to build these data centers and you have to have the components to connect all these things.”
“The number of connections is going parabolic,” he said. “And there’s a whole series of companies above and beyond Nvidia that focus on that connectivity technology.”
One example company Davies pointed to is Astera Labs, which went public last year and has almost doubled since listing.
He said: “I think you’re going to see Nvidia’s growth slow, but there’s so many other opportunities as these data centers get built out, and it’s just starting.”
