Tech consolidation brings new investment opportunities
(Runtime: 4:49. Read the audio transcript.)
Some of the most advanced machinery ever produced is opening exciting opportunities for investors, according to Morten Springborg, global thematic specialist at C WorldWide Asset Management.
Springborg said consolidation in the semiconductor business has revealed clear winners, and offers rewards to investors who stake their claim in the increasing digitization of society.
He described the semiconductor value chain as fundamental to the tech theme. At the top are computer-chip designers and users such as Apple and Nvidia, a gaming company based in California. Those chips are manufactured by “foundries” such as Samsung Group of South Korea, Intel Corp. of California and Taiwan Semiconductor Manufacturing Co. Ltd. of Taiwan.
Increasingly, however, the real prize for investors is the few companies that make complex equipment for those chip-makers.
“We think that this space is particularly interesting because it is a very consolidated market,” he said. “These very few foundries are acquiring machines that are produced by only one company in the world, namely a Dutch company called ASML.”
Springborg described Netherlands-based ASML Holding NV as “probably the most important company in the world” because its lithography machines can print semiconductor designs on silicon wafers as thin as 5 nanometers. The company has plans to go to 2 nanometers.
ASML’s ability to do such precise work is credited with prolonging “Moore’s Law,” the observation that computing power doubles every 18 to 24 months. The law has proven reliable for 50 years, since the world’s first microchip introduced by Intel in 1971.
“There is only one company in the world that has the capabilities of making the machines that are producing at extremely small scale,” Springborg said. “And we believe that ASML will continue to be able to provide the industry with machines that can continue Moore’s Law for at least another 10 years.”
Springbord said ASML excels in the use of extreme ultraviolet light technology (EUV) — a significant improvement over the outdated deep ultraviolet light — which is employed in the production of super-thin silicon chips. Springborg said ASML’s chip orders look strong for at least the next decade.
“What happens after that is going to be a big question mark,” he said. “We know that we will see a parallel evolution of things like quantum computing and even neuromorphic computing. ASML is not exposed here, but at least for the next 10 years, the growth outlook for a company like ASML is quite secure.”
Another technology enabler Springborg likes is Japan-based Hoya Corp., which supplies vital components to ASML. Hoya’s so-called “mask blanks” bear the chip designs that ASML’s EUV machines print on silicon wafers.
Right now, Hoya is the only company capable of supplying mask blanks for EUV machines.
“So today you have a monopoly supplier of the machine — ASML — and you also have a monopoly supplier of one of the most critical components going into that machine, namely the mask blank, and that is Hoya,” he said.
Springborg is also a fan of Swedish tech company Atlas Copco, which has a division dedicated to the vacuum and filter technology that makes such advanced manufacturing possible.
“You need to make sure there’s no dust at all” during the manufacturing process, Springborg explained. “This is where Atlas Copco comes in.”
Atlas Copco’s vacuum technology can clean rooms to fewer than 10 particles of foreign material per cubic metre of air — far cleaner than the recommendation for air in hospital surgery rooms.
“As the world goes to smaller and smaller prints on semiconductors in the years ahead, the requirement for cleanliness only increases,” Springborg said. “We like [Atlas Copco] because they have been tremendous operators. They have been tremendous allocators of capital. They have a formidable ESG record, and they are exposed to growth areas of the world economy.”
Springborg said the pursuit of increased efficiencies has motivated forward-looking businesses — and attracted investors — since the industrial revolution more than 250 years ago. Digitization is the latest iteration of that trend, made possible by the growth of cloud computing, mobile connectivity, automation, big data and artificial intelligence.
“I think we will probably over the next five years see more economic and social change than we’ve seen over the last 20 years, driven by this technological acceleration,” he said.
This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.
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