BOrse Express – These 5G semiconductor stocks escape the maelstrom of the trade war

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Semiconductor suppliers mark new highs

One would think that the global slowdown would beat down the stocks of semiconductor equipment suppliers. These companies make the machines needed to produce highly innovative chips. But in fact, the opposite has happened: many of these stocks have reached 52-week or even all-time highs in recent weeks.

Fall under it ASML Holding (WKN: A1J4U4), KLA Tencor (WKN: 865884), Applied Materials (WKN: 865177) and Lam Research (WKN: 869686). Also Taiwan Semiconductor Manufacturing (WKN: 909800), the largest foundry in the world and thus a consumer of these machines, has risen neatly. As you can see, all of these stocks outperformed the market in the last year, despite heavy losses in December and the trade war.

TSM 1 Year Total Returns (Daily) Chart

Total returns over one year. Data from YCharts

While the rhetoric of the US and China is not relaxing, it looks like both countries are determined to become leaders in 5G technology. Taiwan Semis Management mentioned some very interesting figures in its recent analyst conference on the third quarter.

Full throttle on investment

In its quarterly report, Taiwan Semiconductor announced that it would increase its capital expenditures by a whopping 40% this year. As a reminder, the company is the largest semiconductor contract manufacturer and manufactures chips for many of the world's leading semiconductor companies that do not have their own manufacturing facilities. The company originally expected to invest between $ 10 billion and $ 11 billion in property, plant and equipment this year. But the management now raised this figure to between 14 and 15 billion, 2020 it should look the same.

Why this increase? For the highly innovative chips used in 5G mobile devices and radio antennas, Taiwan Semi sees great demand – much more than originally expected. According to management, $ 1.5 billion of increased capital expenditures will be spent on 7-nanometer technology – the chips that are currently being launched. The other $ 2.5 billion is reserved for the 5-nanometer chips that will be released next year. This nanometer distance in semiconductor products represents the distance between two transistors. The smaller this distance, the more transistors you can pack on a chip, which makes it more powerful.

Management said, "Since the middle of this year, we see acceleration in 5G development worldwide. This will accelerate the introduction and installation of 5G technology in smartphones around the world. "

The Group now expects the 5G launch to be even faster than 4G's. 5G handsets could reach between 10 and 20% market share next year; previously, Taiwan Semi had assumed a mid-single-digit market share.

Smaller chips need larger systems

Increasing 5G demand is leading to rising demand for smaller chips. However, these are becoming increasingly difficult to manufacture: the smaller the chip, the more production steps are required. This is the reason why all of the mentioned semiconductor equipment suppliers are in such high demand. Above all, the EUV technology from ASML Holding is crucial to be able to produce 7-nanometer chips and even smaller architectures. Not without reason, the ASML share has risen so much in the last year, and not without reason, it is trading at a higher price-earnings ratio (P / E).

TSM PE Ratio (TTM) Chart

P / E ratios over one year. Data from YCharts

Another favorite is KLA-Tencor, which manufactures production monitoring equipment that inspects wafers and masks for manufacturing defects. Such diagnostics become more and more important in shrinking transistors, as extreme accuracy is needed to produce the tiny structures accurately and in bulk.

Although the shares of the large semiconductor stock have already made good runs, the major technological trends will not dissipate in the near future. A global recession will slow down the growth of these companies, but the macroeconomic situation will not hold back these companies forever. Therefore, investors should be ready to collect these technology leaders cheaply at resettlers. If then the trade dispute relaxes, so much the better.



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