{"id":225745,"date":"2025-06-13T12:26:03","date_gmt":"2025-06-13T16:26:03","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=225745"},"modified":"2025-06-13T12:36:58","modified_gmt":"2025-06-13T16:36:58","slug":"semiconductors-market-the-core-to-the-modern-economy","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/podcasts\/cents-of-security\/semiconductors-market-the-core-to-the-modern-economy\/","title":{"rendered":"Semiconductors Market: The Core to the Modern Economy"},"content":{"rendered":"\n<p>The semiconductor market is a major part of the modern economy. Since these chips power our daily activities and make up a large part of financial indices, we discuss some important factors to understand when exploring the sector for investment.<\/p>\n\n\n\n<iframe title=\"Semiconductors Market: The Core to the Modern Economy\" allowtransparency=\"true\" height=\"150\" width=\"100%\" style=\"border: none; min-width: min(100%, 430px);height:150px;\" scrolling=\"no\" data-name=\"pb-iframe-player\" src=\"https:\/\/www.podbean.com\/player-v2\/?i=i4cqj-18d6936-pb&#038;from=pb6admin&#038;share=1&#038;download=1&#038;rtl=0&#038;fonts=Arial&#038;skin=1b1b1b&#038;font-color=auto&#038;logo_link=episode_page&#038;btn-skin=c73a3a\" loading=\"lazy\"><\/iframe>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-summary-cents-of-security-podcasts-ep-101\">Summary \u2013 Cents of Security Podcasts Ep. 101<\/h2>\n\n\n\n<p><em>The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made<\/em>.<\/p>\n\n\n\n<p><strong>Cassidy Clement<\/strong>&nbsp;<\/p>\n\n\n\n<p>Welcome back to the <em>Cents of Security<\/em> Podcast. I&#8217;m Cassidy Clement, Senior Manager of SEO and Content at Interactive Brokers, and today I&#8217;m your host for the podcast. Our guest is Brian Colello, Technology Equity Strategist at Morningstar.&nbsp;<br>The semiconductor market is a major part of the modern economy. Since these chips power our daily activities and make up a large part of our financial indices, we&#8217;re going to discuss some important factors to understand when exploring the sector for investment. Welcome to the program, Brian.&nbsp;<\/p>\n\n\n\n<p><strong>Brian Colello<\/strong>&nbsp;<\/p>\n\n\n\n<p>Thanks, Cassidy. Good to be here.&nbsp;<\/p>\n\n\n\n<p><strong>Cassidy Clement<\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah, it&#8217;s awesome to have you on. So why don&#8217;t you tell our listeners a little bit about your background since it&#8217;s your first episode on the program?&nbsp;<\/p>\n\n\n\n<p><strong>Brian Colello<\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah, gladly, happy to be here. Again, Technology Equity Strategist with Morningstar. I&#8217;ve been an equity analyst with the firm going on 17 years now, covering semis\u2014starting with small cap to large cap to now mega cap. When you think about Nvidia at $3 trillion or so\u2014I covered Apple for a few years in between.&nbsp;<br>I had some managerial roles in between as well. But now, focusing a bit more on artificial intelligence, which is certainly keeping me busy. My background is in accounting. I&#8217;m a CPA, so I had the finance background and had to learn the technology. And I&#8217;m always jealous of the engineers that have the engineering background and needed to learn the finance because they could dig into the technical details a little bit better.&nbsp;<br>But yeah, I&#8217;ve been covering the space for quite a while, and so many things have changed and continue to change\u2014and nothing is moving faster right now than artificial intelligence.&nbsp;<\/p>\n\n\n\n<p><strong>Cassidy Clement<\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah, when it comes to AI and almost any talk of the town, if you will, when it comes to financial commentary, it seems like semiconductors tend to be at the core.&nbsp;<br>When we recorded our previous episode, it happened to be on minerals and metals, and we were talking about how that kind of impacts how semiconductors are made\u2014the manufacturing, the pricing valuation sometimes when it goes into companies.&nbsp;<br>But while it may seem like a hot topic, there&#8217;s definitely a history to it\u2014past 15, 20 years. With your background in the industry, why don&#8217;t you tell the listeners a little bit more of, we&#8217;ll say, the brief history, the highlights, the emergence of it all? Because it actually goes pretty deep.&nbsp;<\/p>\n\n\n\n<p><strong>Brian Colello<\/strong>&nbsp;<\/p>\n\n\n\n<p>It does. You could go back to 1940s and 1950s, and there&#8217;s definitely some fascinating stories there with the formation of Fairchild Semi, the defections of some of those engineers that led to Intel.&nbsp;<br>Silicon Valley has its name based on the semiconductor manufacturing. These are all based on silicon. And so that&#8217;s where Silicon Valley comes from.&nbsp;<br>For any listeners that are interested in the space, I think Chris Miller&#8217;s book <em>Chip Wars<\/em> does such a great job of describing both the history and where we stand today from a geopolitical standpoint. It&#8217;s not just the technology of semiconductors that is top of mind, but the geopolitics around it\u2014that most of the high-end manufacturing in this world is done in Taiwan, which is not the necessarily safest or most benign of regions, given how close it is to China and some of its ties there.&nbsp;<\/p>\n\n\n\n<p>But in general, starting\u2014if you go back\u2014starting let&#8217;s say with the dot-com bubble, or starting with the &#8217;90s, it was the emergence of the computer with Intel inside on those PCs.&nbsp;<br>And maybe even just taking a step back: semiconductors are used in basically any type of electronics that you have. So it&#8217;s PCs, smartphones, certainly in the cloud for artificial intelligence. They&#8217;re in your car, they&#8217;re in your electric toothbrush, your garage door opener\u2014really everything in between.&nbsp;<\/p>\n\n\n\n<p>So if you go back to the &#8217;90s, the Intel and the PC process was probably really the biggest, most important piece or where it came into everyday consumers\u2019 lives, because it powered those PCs with the PC boom and the dot-com boom.&nbsp;<\/p>\n\n\n\n<p>From there, if you get into the early 2000s, you have the rise of the flip phone and then the rise of the smartphone\u2014another huge wave. So again, perhaps one of the best pieces of Apple hardware in a phone\u2014I always look at my phone when I&#8217;m doing that\u2014but it&#8217;s the Apple A-series processor inside of there, that amazing technological advancement that Apple made to go there.&nbsp;<\/p>\n\n\n\n<p>And then you also need chips in there to connect to the wireless network, like those from Qualcomm to connect to 4G, 5G. You need a chip for Wi-Fi made by somebody like Broadcom. And then there\u2019s a host of chips in between to regulate the voltage, filter the signals, interfaces, store memory\u2014things like that.&nbsp;<\/p>\n\n\n\n<p>The next big category that I think of is broad market. And there\u2019s really two areas there that I focus on. First is automotive and the car. And if you think of any car commercial today and the new bells and whistles going into cars\u2014that&#8217;s all being done with electronics, and that&#8217;s powered by semiconductors. So that&#8217;s the first big wave in cars.&nbsp;<\/p>\n\n\n\n<p>The next one is electric vehicles, which again, you have a battery, you have plenty of semiconductors in there to manage that power. They&#8217;re used in electric vehicle inverters. They&#8217;re used in the onboard charger. You have battery management systems to make sure that the fuel cells are balancing and loading properly and things like that. So there&#8217;s a whole wave just going into the car.&nbsp;<\/p>\n\n\n\n<p>And then I think about industrial and the Internet of Things\u2014IoT. And this is\u2014for the average consumer\u2014you could think of smart gadgets, and they\u2019re probably all over your home. So if you&#8217;re using, let&#8217;s say, a Ring doorbell or cameras, Wi-Fi, smart meters\u2014all these things that connect to the Wi-Fi in your home, that&#8217;s all again done with semiconductors.&nbsp;<br>And then in factories and industrial equipment, medical equipment\u2014we&#8217;re seeing the same sort of thing. Everything\u2019s getting more processing power, more connectivity, more sensors.&nbsp;<\/p>\n\n\n\n<p>And then finally, the last piece\u2014the biggest piece and maybe the most important piece going forward\u2014is AI, which is being led by Nvidia.&nbsp;<br>And Nvidia is a name that has been on the ground floor of AI development\u2014not just building the semiconductors to enable AI in the cloud, but building the software that allowed all these AI developers to build their large language models.&nbsp;<\/p>\n\n\n\n<p>And so Nvidia is really embedded in that ecosystem, and that&#8217;s why they&#8217;re so dominant and have grown to be such a valuable company. And we think that continues going forward.&nbsp;<br>All of these ChatGPT queries and any large language model you use\u2014any AI\u2014it just takes a massive amount of computing power, exponentially more than what we were using just a few years ago. So what Nvidia and others are providing behind the scenes is really a massive opportunity for the chip space.&nbsp;<\/p>\n\n\n\n<p><strong>Cassidy Clement<\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah. I think when you start to actually break down the integration of semiconductors throughout various products and actual day-to-day utilization throughout\u2014we&#8217;ll say, I think you said around the forties or the fifties. Fifties. So let&#8217;s say around the past 60, 70 years, realistically. These companies, as long as they were able to stay in the game, the way that it was severely advantageous for them and not necessarily the product makers was because the products themselves can have obsolescence, but the chips themselves are able to adapt and have to be used in all products going forward.&nbsp;<\/p>\n\n\n\n<p>&nbsp;<br>So it allowed a lot of a&#8230; adaptability, but then it also, as you mentioned with Taiwan, it shifted a lot of the manufacturing necessity to other places that are able to yield a higher manufacturing skill with utilization of westernized economies paying for that. The other flip of that is Moore&#8217;s Law. When it enters the picture, you&#8217;re starting in with a set of a handful of TVs companies\u2014or maybe when remotes started happening\u2014and then you immediately go, as you mentioned, all the way to something like Apple manufacturing their own silicon, which is not something that every company can say that they can do in-house.&nbsp;<\/p>\n\n\n\n<p>But so much of today&#8217;s processes and day-to-day activity, even in the smallest of ways\u2014even the thermostat on the wall that I&#8217;m looking at right now\u2014I know there&#8217;s a chipboard in there. So how exactly would you define semiconductors&#8217; role within the economy? Do you think it&#8217;s the main core\u2014no pun intended\u2014to the modern economy because of how much is relying on it, and that&#8217;s why these companies&#8217; performances mean so much within almost all main indices for stock market performance?&nbsp;<\/p>\n\n\n\n<p><strong>Brian Colello<\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah. E-e\u2014exactly. You have a lot there. I actually chuckled when you mentioned the thermostat, &#8217;cause that&#8217;s one of my favorite examples as well, &#8217;cause I cover analog semiconductor companies like Texas Instruments and Analog Devices. And the thermostat&#8217;s a great example\u2014you set your thermostat to 71 degrees and it&#8217;s never exactly 71. So you need the analog chip to sense those slight variations in temperature, but then you need to then convert that to a signal\u2014a zero or one\u2014that a microcontroller might run to say, \u201cOkay, yes, now it&#8217;s actually below 71, so turn on the heat,\u201d or whatever it may be.&nbsp;<br>Yeah, that&#8217;s just one of the countless examples you have there.&nbsp;<\/p>\n\n\n\n<p>You also mentioned Moore\u2019s Law\u2014maybe taking a quick step back into the history\u2014that has really been the driver of this industry over the past six years and why it&#8217;s been as important as it is: that you&#8217;re getting basically double the performance, double the amount of transistors every two years.&nbsp;<br>And Intel led the way for 50, 60 years\u2014everything until the last few years, quite frankly. And Intel had a very strong competitive advantage in that chip manufacturing. They were in the lead, which allowed them to have premium pricing so they could invest more and stay on that cutting edge.&nbsp;<\/p>\n\n\n\n<p>And then really, you get to the point of\u2014now you&#8217;re moving atoms and electrons just at a&#8230; just such a miniature scale that it&#8217;s really hard to execute, and Intel&#8217;s execution floundered. And so they went from having a competitive advantage to having a competitive disadvantage to Taiwan.&nbsp;<\/p>\n\n\n\n<p>And so when you get into geopolitics and things like that, it&#8217;s that sort of\u2014let&#8217;s call it slip-up\u2014from Intel, of just not being able to keep pace with what Taiwan was doing, that is potentially causing some of the issues right now in the economy. And certainly geopolitical.&nbsp;<\/p>\n\n\n\n<p>I think the U.S. woke up and realized, hey\u2014two things. One, semiconductors are extremely important. So to your point, are they the core of the economy? Like, they are tangential for sure. They&#8217;re in everything that you&#8230; whatever you think the core of the economy is, there are chips inside of those products. That&#8217;s the piece.&nbsp;<\/p>\n\n\n\n<p>But second, the realization that the vast majority\u2014and certainly all of the leading edge\u2014are done in Taiwan, or even&#8230; Samsung was, quite frankly, second place in Korea. And Intel is still the main chip manufacturer in the U.S., but not on the leading edge. They&#8217;re trying to catch up. We think they&#8217;ll get close\u2014they&#8217;re still not there yet. Taiwan&#8217;s going to keep rolling along.&nbsp;<\/p>\n\n\n\n<p>And then finally, you mentioned&#8230; there&#8217;s such high fixed costs with manufacturing too, that over this history, you had a lot of companies. The saying was, &#8220;Real men build their own fabs.&#8221;&nbsp;<\/p>\n\n\n\n<p>&nbsp;<br>And that saying goes back, I think, to the 1980s or so. But fewer and fewer companies do it. And now Intel&#8217;s really the only digital chipmaker that does that. And that might even be fading away over the next couple of years, &#8217;cause it&#8217;s just so costly to build.&nbsp;<br>So there is a concentration of talent, a concentration of capital, of investment, a concentration of equipment in Taiwan. And it&#8217;s not easy to move that back over from Taiwan to the U.S.&nbsp;<\/p>\n\n\n\n<p>I think that Taiwan ecosystem would still be extremely hard to replicate. And they&#8217;re trying\u2014there are incentives for Taiwan Semi to build in Arizona, and they&#8217;ve committed to building new places. And again, when you get into geopolitics and how important it is to the economy, they&#8217;re discussing big numbers to build in the U.S.&nbsp;<\/p>\n\n\n\n<p>But that is not\u2014that&#8217;s not a switch you can make in three, six, even twelve months. We&#8217;re talking maybe a three- to five-year process.&nbsp;<br>And again, if you think about tariffs on semiconductors coming potentially\u2014you could put on whatever you want\u2014but nothing is going to happen much faster than three to five years, no matter what the tariff is or is not. And that would probably be\u2014I guess if I were in the White House\u2014that would maybe be my quibble.&nbsp;<br>Anything involving tariffs and semis over the next three months is really just a price increase, because you can&#8217;t\u2014the industry just can&#8217;t shift that quickly. Again, concentration of talent, big fixed cost equipment.&nbsp;<\/p>\n\n\n\n<p>Yeah, I think it is core. And then, back to your question of\u2014is it core to the economy? If you don&#8217;t think semiconductors are, certainly people think automotive is, or technology, or AI\u2014and chips are at the center of that. So they certainly have their piece, and it&#8217;s rising.&nbsp;<\/p>\n\n\n\n<p>And again, I&#8217;ve been covering the space for 17 years and it&#8217;s more popular now and more in the national consciousness than certainly when I was covering it.&nbsp;<\/p>\n\n\n\n<p>I think one of my realizations when I was trying to learn this industry is, \u201cOh, this is all pretty cool\u2014technology and equipment.\u201d And there was this new fancy item coming out that was called the iPhone.&nbsp;<br>And I realized that I was covering all of the companies that sell all of the components that go inside to make that work.&nbsp;<\/p>\n\n\n\n<p>At a cocktail party talking about it all and everyone showing their iPhones for the first time\u2014I could point to the chips inside and how it all works. And that was really interesting.&nbsp;<br>And I think I actually probably educated some people, and I don\u2019t think I have to educate that many people on that sort of discussion anymore. I think everyone knows the complexity inside these things.&nbsp;<\/p>\n\n\n\n<p><strong>Cassidy Clement<\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah, it&#8217;s also very interesting from the perspective of the supply chain changes\u2014or the anticipated supply chain changes.&nbsp;<br>The education and the skillset that comes with that is something that also, outside of Intel, the United States as a country&#8230; usually isn&#8217;t&#8230; usually prepared for.&nbsp;<br>So that&#8217;s why that three to five years, at least from discussions I&#8217;ve had with other people in the space\u2014that three to five years seems way more realistic than the one-year turnaround.&nbsp;<\/p>\n\n\n\n<p>Since you mentioned AI and all of these supply chain issues, but there&#8217;s still a high desire for semiconductors, obviously\u2014what are some trends or drivers that you&#8217;ve noticed in the space, since you&#8217;re so close to it and covering it often?&nbsp;<\/p>\n\n\n\n<p><strong>Brian Colello<\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah, exactly. And I think it all starts with AI at this point. That\u2019s the big one. I think AI\u2014and we could start with OpenAI and ChatGPT\u2014I think it\u2019s just such an interesting technology, not because of just what it is\u2014oh, it was a really cool model when it first came out and very powerful\u2014but I think even the average consumer could see the path of where this is going.&nbsp;<br>That this chatbot is only going to get better and better in terms of giving us answers, giving us searches, building more for us. You could see the offshoots from there that are going to specialize.&nbsp;<\/p>\n\n\n\n<p>So I think it caught everybody\u2019s attention\u2014consumer and enterprises\u2014and that\u2019s led to this massive boom in spending. That\u2019s the first one.&nbsp;<br>And we get a lot of, let\u2019s say, questions or skepticism of how big will AI be and what the returns are\u2014as if people think that just the chatbot, \u201cOh, it\u2019s only a chatbot, it\u2019s no big deal.\u201d&nbsp;<\/p>\n\n\n\n<p>Think about how important just even the chatbot is. That\u2019s extremely impressive on its own, but that\u2019s still just a piece of what this does.&nbsp;<br>When we think about the typical enterprise and already how it\u2019s changing software coding and customer service and software and data and how it\u2019s analyzed and how it\u2019s being built and the support you get with any new tool like that\u2014that\u2019s really impressive work.&nbsp;<br>And again, we\u2019re just on the cusp of that.&nbsp;<\/p>\n\n\n\n<p>If you think about\u2014we have another ecosystem of startups that are going to be built. When we\u2019ve discussed 4G and 5G, the biggest winner of that technology is Uber. And it has nothing to do with building phones or building telecom networks or anything like that, but that product wouldn\u2019t exist on a 3G network.&nbsp;<br>We just wouldn\u2019t be able to hail car rides the same way. So they are the winner. And there will be winners based on all this AI technology that we don\u2019t even know yet\u2014but that\u2019s coming. I think people are expecting it to be here today, and it\u2019s not. But it\u2019ll be here soon.&nbsp;<\/p>\n\n\n\n<p>Again, I think we\u2019re going to see a lot of software improvement.&nbsp;<br>You could even think about this chat we\u2019re having right now\u2014we\u2019re only a couple years away from having a real-time transcript and images coming up, or I mention a name and the ticker pops up. There\u2019s just so much improvement in communications as well, but all areas of software\u2014we\u2019re seeing that.&nbsp;<\/p>\n\n\n\n<p>And then really the moonshot projects are probably the really most exciting piece\u2014so like robotics, autonomous driving, drug discovery. There\u2019s so much more processing power needed to power those sorts of advancements that it\u2019s really exciting in those industries.&nbsp;<br>Because now they\u2019re not even all the way there yet\u2014of having as much processing power and AI models for something like drug discovery\u2014but they\u2019re going to get there.&nbsp;<\/p>\n\n\n\n<p>And I think AI is interesting because you have\u2014there are a lot of companies involved directly and indirectly. We discuss Nvidia, and again\u2014they are in charge because they have the best chips for AI, and they also have the software on which it\u2019s all built. And even if AMD and others come close, they still have the best networking and connectivity. Because really, we discuss GPUs for AI as if Nvidia\u2019s using one chip. That\u2019s not really the case. They really glue 10,000 of these chips together to train a model. And these training runs cost easily millions of dollars, maybe even hundreds of millions of dollars. So it\u2019s that connectivity that matters.&nbsp;<\/p>\n\n\n\n<p>For every Nvidia GPU board, you have the memory on it\u2014it\u2019s manufactured by a company like Taiwan Semi. You have the chip equipment makers that make the equipment to enable it all. So it\u2019s really propping up the entire industry right now. So again, AI is the big one. And then I mentioned my other two favorites that are more in my coverage: just automotive and IoT. And really, it\u2019s just smarter devices across the board. So that is a slower, steadier growth rate. It can face headwinds depending on where we are in the macro economy. Certainly, it\u2019s hard to grow really well if car sales are plummeting\u2014for example, like they did during COVID, or I think there\u2019s concern that they might again with tariffs coming around in the automotive space. &nbsp;<\/p>\n\n\n\n<p>But in general, you\u2019re still seeing more bells and whistles. There\u2019s so much room for more safety. And I think we\u2019ve all known for the past decade that the autonomous vehicle is coming\u2014that self-driving car. We see it with Waymo. It\u2019s out there. But more and more cars in everyday life\u2014all those advancements getting to an autonomous vehicle\u2014they\u2019re going to come into the regular car as well. So your basic sedan, your basic SUV\u2014it\u2019s going to be smarter and smarter five years from now, ten years from now. And again, that\u2019s all semis. And your house is going to get smarter, your factory is going to get smarter, and you\u2019re just seeing that advancement. So software and semis are really driving this change in a lot of industries.&nbsp;<\/p>\n\n\n\n<p><strong>Cassidy Clement<\/strong>&nbsp;<\/p>\n\n\n\n<p>I remember back in my college days, having to write a term paper on quantum computing.&nbsp;<br>And I remember going through the idea of harnessing that power. Because that is, a lot of people\u2014at least theorists in the area\u2014that\u2019s the main, say, hiccup for now: is the processing power. Trying to find it in a sustainable way, trying to make sure that the power can actually be utilized now, not frying itself, accurately being used for something a little bit more than generating an image of your cat with sunglasses\u2014things along those lines, yes.&nbsp;<\/p>\n\n\n\n<p>But when people initially think of these companies\u2014you\u2019d mentioned AMD, Nvidia, Intel\u2014we could start to bleed into other areas that semiconductor is exposed to: Samsung, Apple. What are the ways that people could invest in this industry? We all know about stocks, but are there other ways for people to get exposure within their portfolio?&nbsp;<\/p>\n\n\n\n<p><strong>Brian Colello <\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah, stocks are the obvious one. And again, you mentioned some of the large caps. There\u2019s a lot of high-quality\u2014let\u2019s call it\u2014in the mid-cap space as well, particularly if you\u2019re thinking about broad-based companies\u2014maybe not as exposed to AI, but with good exposure to the car and industrial and things like that. So there are a lot of names there.&nbsp;<\/p>\n\n\n\n<p>Obviously, you can invest in options off of that as well. For us, as equity analysts, I focus day-to-day on the stock piece of it. There are certainly ETFs out there that track baskets of stocks. I would encourage anyone that is looking at that to look at sector weighting and cap weighting and things like that, because Nvidia is such a big piece of the semiconductor industry now. Some are\u2014some have caps, some don\u2019t. That probably will matter to performance one way or the other.&nbsp;<\/p>\n\n\n\n<p>And then there\u2019s corporate debt out there. So in the fixed income space, these companies do issue debt in order to pay dividends and make deals and things like that.&nbsp;<br>My day-to-day is looking at the stocks, and that keeps me busy enough.&nbsp;<\/p>\n\n\n\n<p><strong>Cassidy Clement<\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah, I&#8217;m sure it&#8217;s never a calm day in the chips or semiconductor space. At least that&#8217;s what I found in all the news I follow.&nbsp;<\/p>\n\n\n\n<p><strong>Brian Colello<\/strong>&nbsp;<\/p>\n\n\n\n<p>No, it&#8217;s\u2014&nbsp;<\/p>\n\n\n\n<p><strong>Cassidy Clement<\/strong>&nbsp;<\/p>\n\n\n\n<p>So when you&#8217;re adding\u2014in that vein, actually\u2014when you&#8217;re adding or considering adding any of these semiconductor-directly-exposed or indirectly-exposed products into your financial strategy, what are some things that listeners should think about? Are there certain pros and cons that are associated, or is it mainly focusing on the manufacturing and the geopolitical risk that we talked about in the beginning?&nbsp;<\/p>\n\n\n\n<p><strong>Brian Colello<\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah, that&#8217;s a good question. So geopolitics always matter. And semis is top of mind\u2014that\u2019s for any investor in any industry, right? If you&#8217;re investing in bank stocks, you have to worry about regulations, or healthcare, or energy. And so now semiconductors fall into that, whereas that wasn\u2019t an issue.&nbsp;<\/p>\n\n\n\n<p>So that\u2019s new for me and new for us in that industry\u2014of who will be allowed to sell chips wherever. Right now, Nvidia and AMD aren&#8217;t allowed to sell anything decent in China. I wouldn&#8217;t buy those names hoping for a turnaround there, but they should grow nicely in the U.S. But certainly, they&#8217;re going to take a hit in 2025 from that. So geopolitics is one\u2014that is now top of mind and matters.&nbsp;<\/p>\n\n\n\n<p>I&#8217;d probably say the biggest one for the industry is: cyclicality matters. Thinking about whether you&#8217;re buying during an upturn or a downturn. At Morningstar, we spend a lot of time thinking about long-term competitive advantage. We take a long-term view with how we value companies.&nbsp;<\/p>\n\n\n\n<p>So we usually recommend buying these names on downturns\u2014when things are ugliest\u2014because, exactly to your point, chips are such an important part of the economy. They will bounce back. Any downturn in these businesses is not because chips have been replaced by something else. You tend to have big inventory pulls one way or the other, and you get the bullwhip effect on the way down\u2014where a little shortfall in demand in a few different places leads to a bigger shortfall in orders for these companies.&nbsp;<\/p>\n\n\n\n<p>So yeah, it&#8217;s always important to know where you&#8217;re buying\u2014where you are in the cycle.&nbsp;<\/p>\n\n\n\n<p>That&#8217;s a common question we get. Some investors will say the industry is less cyclical than in the past. Maybe that&#8217;s true, because I suppose the cell phone era was violently cyclical maybe 20 years ago. But we just went through a brutal downturn in 2024\u2014coming off of post-COVID.&nbsp;<\/p>\n\n\n\n<p>Any time actual demand falls short of forecast demand, you&#8217;re going to get a down cycle. &nbsp;&nbsp;And quite frankly, nobody knew what to order or how much to order during COVID, and so you had some pretty violent swings there.&nbsp;<\/p>\n\n\n\n<p>Nvidia is a unique case. Again, we&#8217;re so early in AI that we&#8217;re not at a cycle yet. There will be cycles at some point for Nvidia and for AI spending, but we&#8217;re still just in\u2014we&#8217;re at the upturn of the first cycle. We&#8217;re not anywhere near maturity yet. So that&#8217;s something that&#8217;s important for investors to keep in mind.&nbsp;<\/p>\n\n\n\n<p>The third is that, again, this is still, for the most part, a high fixed-cost business. And so gross margins are still very important\u2014even if you outsource everything to Taiwan Semi. Gross margins are a symbol of your pricing power, your ability to fend off competition, to win key designs and maybe stay in those designs.&nbsp;<\/p>\n\n\n\n<p>We like companies that have high switching costs\u2014where you&#8217;re in a device, and you&#8217;re in that product for the life of it. And so a car\u2014if you win that design\u2014you might be in that car for 10 years. If you sell into an iPhone, you&#8217;re in that iPhone model for maybe two years, three years, and then Apple\u2019s redesigning it. 3So those wins get very price-competitive, and you&#8217;re not in it forever.&nbsp;<\/p>\n\n\n\n<p>It&#8217;s much safer, much more lucrative to be in a satellite, a car, a piece of medical equipment\u2014even like an electric toothbrush. You could sell that, and that&#8217;s not going to be redesigned too often. So that\u2019s a big benefit.&nbsp;<\/p>\n\n\n\n<p>But if a company does have high manufacturing, it has high fixed costs. And so revenue is really all that matters, because if you have that shortfall in revenue, they can&#8217;t shrink the business or downsize the business or cut costs enough to offset it So you get a significant drop in earnings on the way down\u2014and vice versa.&nbsp;<\/p>\n\n\n\n<p>And again, why we like these names in downturns\u2014when things look really ugly\u2014you could get massive operating leverage on the way back when sales recover.&nbsp;<\/p>\n\n\n\n<p>And we\u2019ve seen over time\u2014when you have these downturns, like the Great Financial Crisis, like COVID\u2014semis are one of the places where you see green shoots faster than others. Because all of this production\u2014if you want to start ramping up cars, you ramp up production of your smart gadgets or appliances or whatever\u2014you need to order those semiconductors for production. So the semiconductor orders come first, before all these things start to hit the market. And so that&#8217;s usually one of the first signs that we\u2019re bouncing back as an economy.&nbsp;<\/p>\n\n\n\n<p><strong>Cassidy Clement<\/strong>&nbsp;<\/p>\n\n\n\n<p>For sure. When you&#8217;re starting to look at these types of companies that are making a piece that is integrated into many other things\u2014I know that sounds a little abstract\u2014but just to think about it that way: in simple terms, the market cycle, keeping an eye on their competitive advantage, and how crowded it is in the space, and what their financial metrics are looking like\u2014those are things to keep in mind for a lot of investments.&nbsp;<\/p>\n\n\n\n<p>But for this specifically\u2014this area with semis\u2014as you said, there are different ways to look at a potential investment. Am I investing in the concept, the direct product, or am I looking at what makes up the guts of this? Is this something that can be extrapolated to other items?&nbsp;<\/p>\n\n\n\n<p>It\u2019s a little bit more of a deeper thought\u2014a complex school of thought\u2014when you&#8217;re looking at something. But if you&#8217;re able to do it that way, as you said, you can look at these companies a little bit more for not only their products, but the services that their products provide to many other companies and items\u2014throughout, especially, the United States economy, but now very much so globally.&nbsp;<\/p>\n\n\n\n<p><strong>Brian Colello<\/strong>&nbsp;<\/p>\n\n\n\n<p>I would say that the end markets matter probably more than the products themselves. We\u2019ll see press releases of a new analog chip or microcontroller comes out\u2014but look, if the car market is struggling, that chip isn\u2019t going to sell if the carmakers aren\u2019t building cars right now.&nbsp;<br>So the timing of that\u2014or the importance of that chip\u2014doesn\u2019t matter.&nbsp;<\/p>\n\n\n\n<p>I suppose that\u2019s the sort of thing that\u2019s obvious to me and maybe not to the average investor, but\u2014yeah. And vice versa\u2014if the phone market is down, if the PC market\u2019s down, if cars are down\u2014that\u2019s going to matter.&nbsp;<\/p>\n\n\n\n<p>Again, think about Nvidia\u2014like, Nvidia might have the next greatest product in the world coming out\u2014and they probably do. But if Microsoft\u2019s going to cut spending, and Amazon and a couple others\u2014it\u2019s not going to matter all that much. The end-market demand and what\u2019s being built is coming. And that may or may not tie to the overall economy.&nbsp;<\/p>\n\n\n\n<p>So for something like cars\u2014yeah, maybe there\u2019s a slowdown, and all those content gains are going to be not as growthy as what we would\u2019ve thought if there are fewer cars being sold. Or maybe because of CE, there are fewer PCs being sold, or something like that. But in something like AI\u2014it seems like that spending\u2019s going to happen either way. And interest rates at 3% or 5% aren\u2019t going to matter very much because it\u2019s such a new technology.&nbsp;<\/p>\n\n\n\n<p>So yeah, absolutely\u2014the end market and the technology matters as well. I&#8217;ll say sometimes, other times a little less. But it is tricky, and it does make it exciting.&nbsp;<\/p>\n\n\n\n<p><strong>Cassidy Clement<\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah, there\u2019s definitely a lot to consider. But thanks so much for joining us today, Brian.&nbsp;<\/p>\n\n\n\n<p><strong>Brian Colello<\/strong>&nbsp;<\/p>\n\n\n\n<p>Yeah, happy to be here. Thanks again.&nbsp;<\/p>\n\n\n\n<p><strong>Cassidy Clement<\/strong>&nbsp;<\/p>\n\n\n\n<p>Sure. So as always, listeners can learn more about an array of financial topics for free at interactivebrokers.com\/campus. Follow us on your favorite podcast network, and feel free to leave us a rating or review. Thanks for listening, everyone.&nbsp;<\/p>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The semiconductor market is a major part of the modern economy. 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