Whether it’s electric vehicles, renewable energy products, smart devices, or more, semiconductors are foundational pieces for a variety of disruptive technologies. Add artificial intelligence (AI) to that list.
That’s one reason why semiconductor stocks and exchange traded funds such as the VanEck Semiconductor ETF (SMH) are soaring this year. No asset class moves up in a straight line, but the long-term outlook for chip stocks, including SMH holdings, is compelling. After all, some experts think that the global economy is in the midst of a fourth industrial revolution and the second in which semiconductors are vital drivers.
In its new whitepaper “Silicon Alchemists & AI: 2023 Outlook for Semiconductors,” VanEck explores topics including the competitive advantages enjoyed by some chipmakers, how the relationship between AI and semiconductors is expanding, and how AI is ushering in a new growth regime for the chip industry.
Regarding the fourth industrial revolution — obviously a captivating concept for many investors — AI is a part of it, but it’s much more expansive, and that’s potentially positive for assets such as SMH. As VanEck noted, the fourth industrial revolution includes concepts such as 5G, autonomous driving, the internet of things (IoT), and robotics — all of which depend on chips.
Semiconductors Make Essential Products
There are benefits to investing in companies that make essential products. In some cases, those perks include wide moat status. Fortunately for investors considering SMH, there’s a strong case that many of the ETF’s member firms are purveyors of essential products.
“They control the computers, and mobile devices we use to communicate, the cars and planes we rely on to travel, the machines that diagnose and treat illnesses, the military systems that protect us, and the electronic gadgets we use to listen to music, watch movies, and play games, just to name a few,” according to the VanEck paper. “And not only does semiconductor technology make these devices possible, but it also makes them more compact, less expensive and more powerful.”
To the point about wide moats: SMH and the chip industry at large fit that bill. Four of the hallmarks of a wide moat company are efficient scale, intangible assets, network effects, and switching costs — boxes checked by many SMH components.
Exploring two of those concepts — intangible assets and switching costs — SMH holdings have patent-rich portfolios that ward off competitors. For those that have products that aren’t patent-protected, switching costs come into play because it can be expensive and time-consuming for companies to switch products and vendors.
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