On October 9, when rumors of the buyout started bubbling up, Bloomberg reported that the takeover by AMD would be more bad news for Intel Corp. (NASDAQ:INTC). The deal would “give AMD more of the pieces needed to break Intel’s stranglehold on the profitable market for data-center computer components,” the Bloomberg report said.
Products by Xilinx have applications in artificial intelligence and telecommunications that would complement AMD’s products and yield components for customers to buy.
This is a strong buy for AMD. Xilinx recently reported second-quarter results surpassing expectations. The earnings per share of $0.82 for the period topped estimates of $0.77. Helping fuel the numbers, Xilinx said, was its data-center business as well as aerospace and defense-industry activity.
That $35 billion price tag makes this the third-biggest semiconductor deal ever. Avago’s 2015 takeover of Broadcom for $37 billion, leading to Broadcom Inc. (NASDAQ:AVGO), comes in second, while Nvidia Corp. (NASDAQ:NVDA)’s $40 billion acquisition of U.K.-based chip designer ARM from SoftBank Group Corp. (OTCMKTS:SFTBY) earlier this year comes in first.
This near-constant reshuffling of the chip leaderboard can make it seem difficult to pick a winner. What if you pick up a stock that ends up getting bought out for less than your shares are worth? Or if you hold a buyer that gets dinged because Wall Street decides it made a bad deal?
Moreover, historically, the semiconductor industry has slavishly followed the extreme booms and busts of the demand cycle for PCs and servers. As a result, stocks in the sector have tended to zigzag between extreme highs and lows, rather than trend higher over time.
For decades, that demand cycle has made intelligent semiconductor investing a full-time job.
But that cycle is changing in ways that are starting to make chip investing more reliably profitable.
Today, I’ll tell you why we’re seeing those changes.
Plus, I’ll show you an investment you can make today that will allow you to take advantage of all the chip deal-making we’re seeing — and that is much simpler than trying to pick the winners and losers.
Take a look …
“This Time Is Different”
Because of the semiconductor demand cycle, investors rarely “pay up” for peak earnings in the sector. At the top of the semiconductor cycle, it is not unusual to find chip companies selling at a single-digit price-to-earnings ratio.
Most investors — professional and individual alike — have long assumed “that’s just the way it is.” They assume semiconductor stocks have more in common with “deep cyclical” stocks like Caterpillar Inc. (NYSE:CAT) and U.S. Steel Corp. (NYSE:X) than they do with tech stocks like Microsoft Corp. (NASDAQ:MSFT) or Apple Inc. (NASDAQ:AAPL).
That perspective, born of long experience, makes perfect sense. But I am tempted to utter the four most expensive words in investing: “This time is different.”
Semiconductor demand is no longer just a “PC thing.” It is an every-cutting-edge-technology thing.
Every time people use buzzwords like artificial intelligence, autonomous vehicles, Internet of Things, virtual reality, robotics, or 5G, they are talking about combinations of storage, memory, and software. Even our most “basic” technologies are made up of these three building blocks.
That makes semiconductors one of the cornerstones of the phenomenon that we call the “Technochasm” — that is, the wide and growing gap between technology companies … and everyone else.
In the automotive industry, for example, many experts estimate that the demand for memory will roughly double within the next year. Looking out to 2025, when fully autonomous vehicles will begin rolling down the road, they predict those vehicles will need nine times the amount of DRAM as today’s autos and a whopping 100 times the amount of NAND flash memory.
Other industries are ramping up demand for memory as well … and doing so at a rapid pace.
That’s why I think investors should take a look at the VanEck Vectors Semiconductor ETF (NASDAQ:SMH). It’s a fund that holds a portfolio of world-leading computer chip companies like AMD, Intel, Nvidia, and Qualcomm Inc. (NASDAQ:QCOM).
The companies in this ETF’s portfolio are riding a powerful jet stream of technological innovation. The world of today is already heavily reliant on bundles of software and semiconductors. The world of tomorrow … even more so.
That’s why the entire semiconductor sector has been on a tear since the COVID-19-driven depths of mid-March.
Interestingly, in an odd way, the coronavirus could help boost semiconductor demand. After all, almost every commercial or recreational activity that eliminates or reduces human interaction relies on semiconductors.
In the world of personal amusement, think of gaming consoles, tablets, virtual-reality headsets, and smartphones. In the commercial space, robotics, AI, machine learning, computer vision, etc. all require computer chips of some sort.
SMH gives you access to all that — and to multibillion blockbuster deals like the one we just saw between AMD and Xilinx.
Of course, it’s not the only semiconductor trade worth making…
This Chipmaker Will Benefit From the 5G Rollout
I recently recommended one of the world’s Top 5 memory-chip makers to Fry’s Investment Report subscribers.
It specializes in DRAM and NAND memory chips. DRAM, or dynamic random-access memory, is the type of memory commonly used in personal computers and servers, while NAND chips are the flash memory chips used in USB drives and smaller devices.
Looking ahead, this company expects data center demand to remain healthy, while smartphone and consumer end-unit sales should resume growing. Lastly, the company says new gaming consoles will drive stronger DRAM and NAND demand.
In the mobile sector, it expects a meaningful boost in demand from the global 5G rollout. Not only will consumers be swapping out their old smartphones for the new 5G versions, but the new phones will also pack a lot more computing firepower than the old phones.
For example, 5G phones have 6 gigabytes (GB) of DRAM and 64–128 GB of NAND, versus 4G phones with 2–4 GB of DRAM and 32–64 GB of NAND.
Because global 5G deployments will enable an entire new generation of technologies to flourish, demand for memory and storage should surge for years to come.
Bottom line: This company finds itself ideally positioned to profit from a long-term surge in demand for memory and storage … two of the Technochasm’s building blocks.
Find out how to join us at Fry’s Investment Report here.
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south.