Semiconductors and Advancements Investors Should Watch Out For

Semiconductors are materials that conduct electricity but only under certain conditions. They’re an essential component in modern electronics found in products from smartphones and laptops to cars and medical devices. Semiconductors include microprocessors, memory modules, and integrated circuits.

The semiconductor industry is notoriously cyclical and faces vast shifts in demand but it’s expected to grow significantly into the early 2030s.

Key Takeaways

• The semiconductor industry is critical to modern electronics and is a major global industry.
• The industry has occasionally faced chip shortages due to disruptions in the supply chain caused by the pandemic, trade tensions, and shipping delays.
• The semiconductor industry is driven by increasing demand for technologies such as AI and major investments from the U.S. and governments worldwide.
• The largest semiconductor makers in the world are U.S.-based Intel (INTC) and Taiwan’s TSM.
• China, Japan, Taiwan, South Korea, and the United States were the top five countries producing semiconductors as of 2024.

The Semiconductor Industry: An Overview

The importance of semiconductors in the global economy lies in their ability to process and transmit information. Semiconductor companies are among the largest in the global stock markets and include NVIDIA Corporation (NVDA), Taiwan Semiconductor Manufacturing Company (TSM), and Broadcom Inc. (AVGO). Semiconductors are essential to technologies such as artificial intelligence (AI) and the Internet of Things.

The U.S., EU, and other areas have committed billions to expand regional semiconductor manufacturing due to worries about the effects on national security and competitiveness of shortages.

The U.S. CHIPS and Science Act of 2022 provided $39 billion in grants and a 25% investment tax credit plus $13.2 billion in research and development. The Semiconductor Industry Association predicted in a 2024 report that these and similar incentive programs in Taiwan, South Korea, Japan, and India should help propel about $2.3 trillion in private-sector investment in wafer fabrication from 2024 through 2032. The U.S. would see the largest increase in capacity at about 203%.

Semiconductor Shortages

The semiconductor industry faced a prolonged chip shortage after the pandemic that disrupted supply chains and delayed manufacturing in autos and other sectors. PC sales slumped but overall demand for semiconductors from basic microcontrollers and memory chips to the most sophisticated high-performance processors outgrew producer capacity. Production and supply chain slowdowns were largely mitigated by mid-2024, however.

Demand was already outstripping supply before the pandemic because of the increasing demand from companies involved in AI, the Internet of Things (IoT), and advanced cellular networks that require more powerful and efficient semiconductors. The pandemic also reshaped global demand as people shifted to remote work and online learning, exacerbating trends that were already underway. International trade in semiconductors increased 43% between 2017 and 2022.

The semiconductor industry has also been an issue in geopolitical strife and trade tensions. The U.S. government placed export restrictions on Chinese semiconductor companies, citing concerns about intellectual property theft and national security.

Record Profits

The semiconductor industry enjoyed record profits and record stock prices from 2020 through 2024 despite a brief dip in 2022.

Chip stocks slumped in 2022 due to fears of a global recession. Weaker consumer spending meant that companies cut back on semiconductor products even as chipmakers invested billions in new fabrication plants to increase supply. Then the U.S. Department of Commerce announced strict export restrictions on selling semiconductors and equipment to China in 2022 which cost billions of dollars in revenue for several struggling semiconductor firms.

This chart shows the VanEck Semiconductor Index ETF (SMH) prices from 2020 to the second quarter of 2024.

The semiconductor sector began recovering by mid-2023 and reached record highs in early 2024 due in no small part to the rise of NVIDIA, a leader in the growing GPU market for crypto mining and AI applications. NVIDIA is the largest holding for SMH at about 20% with TSM at about 13% and Broadcom at 8%.

Technological Advances in Semiconductors

The semiconductor industry’s future is closely intertwined with the development of several key technologies including AI, IoT, green energy, autonomous vehicles, and 5G+ networks. The increasing demand for faster, more efficient, and more powerful computing devices is driving the need for semiconductor materials, manufacturing processes, and chip architectures.

The Return of Germanium

The return of germanium as a semiconductor material has been a notable development. Germanium was used in the first transistors but it was largely replaced by silicon because silicon is abundant, costs less, and tests better for certain aspects of conductivity. Germanium’s higher electron and hole mobility makes it more efficient for high-performance transistors, however.

Researchers are exploring ways to integrate germanium channels into circuits. This could lead to faster and more energy-efficient devices. Advances in germanium-based transistors such as FinFETs and nanowire designs could help overcome some of the limitations of silicon as the industry approaches the physical limits of its materials.

Highly Purified Silicon

Researchers have also made a breakthrough in manufacturing highly purified silicon and this could be a boon for quantum computing. They’ve created a material that can sustain the delicate quantum coherence necessary for reliable quantum calculations by using a focused beam of pure silicon-28 to replace the undesirable silicon-29 atoms in a chip. This brings the realization of robust, scalable quantum computers one step closer.

Scaling up Capacity

Scaling up production while maintaining quality and reliability is critical for the semiconductor industry. It could involve investing in manufacturing technologies such as extreme ultraviolet lithography which enables the creation of smaller and more precise chip features. The development of sophisticated packaging techniques such as 3D chip stacking and wafer-level packaging can also help improve chip density and performance.

The funding from the CHIPS Act should vastly increase the size of the U.S. semiconductor industry, tripling domestic semiconductor manufacturing capacity by 2032. The EU will also see the fruits of its European Chips Act and China has initiated the third phase of its semiconductor funding. Incentive programs emerged or expanded in the first half of the 2020s in Taiwan, South Korea, Japan, and India.

Companies have made significant investments in both established and new semiconductor manufacturing regions. These will also increase production across the world.

Wafer Fabrication

Wafer fabrication is projected to become more durable by geographically diversifying with leading-edge capacity expanding beyond Taiwan and South Korea to include the U.S., Europe, and Japan. China and Taiwan should continue to hold the largest share in global capacity in assembly, testing and packaging (ATP). Countries in Southeast Asia, Latin America, and Eastern Europe are expected to expand ATP activity, however, helped along by government and investor support.

The development of sophisticated packaging and chiplet designs is also driving some ATP production growth in the U.S. and Europe near their wafer fabs.

Industry Challenges

The semiconductor industry also faces some challenges, however. A major concern is the increasing cost and complexity of chip manufacturing as sizes continue to shrink. Developing manufacturing processes and materials such as germanium requires billions in research and development. Geopolitical tensions and trade disputes such as those between the U.S. and China, can cause bottlenecks in trading.

U.S.-China Semiconductor Tensions

Lingering tensions between the U.S. and China in the semiconductor space stem from U.S. efforts to curb China’s technological advances while also aspiring to rejuvenate domestic chip manufacturing.

Top Semiconductor Stocks and ETFs

The largest semiconductor stocks by trailing 12 months revenue in 2024 were:

1. Samsung (005930.KS): $197 billion
2. TSM: $74 billion
3. NVIDIA: $61 billion
4. Intel: $54 billion
5. Broadcom: $39 billion
6. Qualcomm Inc. (QCOM): $36 billion
7. ASML Holding N.V. (ASML): $30 billion
8. Applied Materials (AMAT): $26 billion
9. Advanced Micro Devices Inc. (AMD): $23 billion
10. SK Hynix (000660.KS): $22 billion

Samsung is based in South Korea and has semiconductor revenues but it’s a diversified business. The others have a very high percentage of their companies involved in semiconductors.

These exchange-traded funds (ETFs) track the semiconductor sector:

• VanEck Semiconductor ETF (SMH)
• iShares Semiconductor ETF (SOXX)
• SPDR S&P Semiconductor ETF (XSD)
• Invesco Semiconductors ETF (PSI)
• First Trust Nasdaq Semiconductor ETF (FTXL)

Who Leads the Semiconductor Industry?

The largest semiconductor makers in the world are South Korea’s Samsung, U.S.-based NVIDIA and Intel, and Taiwan’s TSMC. The top five countries producing semiconductors were China, Japan, Taiwan, South Korea, and the U.S. in 2021.

Why Invest in Semiconductors?

Investors often consider adding semiconductor stocks or ETFs to a diversified portfolio. The semiconductor industry is a crucial component of the technology sector and plays a significant role in powering many devices including computers, smartphones, and other electronic devices.

Demand for semiconductors is likely to grow as technology continues to advance, driving revenue and profits for semiconductor companies. A focus on innovation can lead to significant long-term growth potential for companies that are successful in developing new products.

What Is the Future of Semiconductors?

The semiconductor industry is expected to grow over the long term, driven by continued demand for electronics and technological advances. The industry itself is highly innovative and chips have become exponentially more efficient and powerful.

Semiconductors won’t be replaced anytime soon although they’ll continue to improve. The discovery and application of materials like graphene, a novel form of carbon, the advent of quantum computing, and the use of photonic circuits may also be used alongside traditional semiconductors.

The Bottom Line

The semiconductor sector is a major part of the stock market. It’s not just a major player by market capitalization but is critical to many industries such as automotive, healthcare, and telecommunications. Disruptions in the industry such as after the pandemic showed its importance across the economy.

The performance of semiconductor stocks can impact the broader market, as seen in 2024 when the sector hit record highs. This followed a sluggish 2022 and 2023 when the sector experienced losses, contributing to a measurable drag on the overall market. Investors should closely monitor the performance of the companies that make them because the chip market is expected to continue growing.