Nvidia, TSMC and ASML, the big three with the potential for strong and sustainable growth
27 AUG, 2024
Author: Olivier de Berranger, CEO and Chief Investment Officer, and Adrien Bommealer, Fund Manager at La Financière de l'Echiquier (LFDE)
The semiconductor industry is at the heart of all major technological innovations. There can be no digitalisation without chips, just as there can be no iPhones, Facebook or Teslas without chips. Nor can there be modern defence systems. These chips are essential and provide computing power and storage capacity. With each cycle of innovation, a dominant ecosystem emerges. The PC revolution in the early 1980s was dominated by Intel, with the complicity of Microsoft. The smartphone revolution, 25 years later, was dominated by Qualcomm on an ARM architecture, all manufactured in Taiwan by TSMC on ASML machines.
The current technological revolution, that of AI, will have a much greater influence on our lives than previous ones. The dominant ecosystem of this new revolution has already been identified. Importantly, it is transnational: Nvidia designs GPUs in the US, Taiwan's TSMC is the only foundry with the semiconductor fabrication plants advanced enough to produce semiconductors at the finest resolutions, and finally ASML, which is based in Europe, is the only semiconductor machinery company capable of developing the lithography machines, a key stage in the manufacturing process.
The competitive advantages of these three players are such that they should remain dominant throughout this innovation cycle. From this point of view, they clearly deserve to be designated as the Magnificent 3. ASML, which has a monopoly in lithography, sells its most powerful machines for $250 million per unit; TSMC needs more than $10 billion for each new fab; and Nvidia has been developing GPU architecture for more than 30 years. We believe the earnings growth of these three companies will be strong and durable.
We do not believe that the eventual risk to this ecosystem is technological. It is, in fact, highly geostrategic, as oil once was. One thing is starting to become clear: countries that master computing power will have a significant advantage. So will governments' protectionist reflexes derail international technological cooperation that could benefit us all? The US Inflation Reduction Act provides for $52 billion to relocate fabs. Europe has launched its Chips Act and plans to invest 43 billion in the construction of new factories on its territory.
China has long been trying to develop a semiconductor industry, with moderate success, but is encountering US efforts to block access to ASML's more sophisticated machines. Finally, if China were to take Taiwan by force, it would secure control of TSMC, but would probably lose access to ASML. The concept of ‘happy globalisation’ is but a distant memory. The geostrategic situation is the main risk for this industry and therefore for the Magnificent 3.
