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Twenty-five years ago, Intel made history by becoming one of the first two technology companies to be included in the Dow Jones Industrial Average. Now, fellow semiconductor company Nvidia has replaced Intel in the blue-chip index, with its stock up seven times over the past two years. This is just the beginning of the upheaval facing the chip sector.
Demand for artificial intelligence chips that power generative AI technology remains strong, and high-end AI chips remain in short supply. Meanwhile, with only a handful of chipmakers operating in this lucrative market, profit growth and stock price appreciation in the sector appear guaranteed.
But investing in semiconductor stocks this year has been a very risky bet. While Intel’s stock price is down nearly 50%, Nvidia has tripled and is now the best-performing stock in the benchmark. What’s behind the extreme differences in fortunes between semiconductor stocks?
The industry faces three major challenges. The first is that most chipmakers currently lag behind in the design and manufacturing of high-performance AI chips. Nvidia’s advanced designs mean chipmakers are now held to higher standards than when most of the global chip demand came from smartphone and car makers. Increasingly stringent quality standards mean longer lead times for the few chipmakers with the skills and funding to produce advanced chips.
Second, the world’s two largest chipmakers capable of producing high-end AI chips are currently struggling to recover from past failures. In Intel’s case, its lead in global chip manufacturing began to erode after just one delay in 2015, when it made changes to its factories that were supposed to make chips faster.
Lack of investment added to the delay, and it took just two years for Taiwanese rival TSMC to close the technology gap with Intel, which began making 10-nanometer chips in 2017. Since then, the gap has widened further, with Intel ceding its manufacturing advantage. To TSMC.
Compared to TSMC’s 62 percent market share, Intel’s presence in the chip manufacturing business (a particularly lucrative area because Nvidia outsources the production of its physical chips) is negligible. The same applies to Samsung. Samsung has fallen behind SK Hynix in manufacturing high-bandwidth memory chips, which are a key part of all Nvidia AI chips. According to TrendForce data, SK is expected to overtake Samsung with more than 52% market share this year.
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Third, like real estate and automobiles, the premium segment of chips is dramatically outperforming other markets. The profitability gap between high-end chips and general-purpose memory chips, or legacy chips used in traditional electronics, has widened in recent years. One reason for this is the slowdown in demand for devices such as smartphones and PCs. However, the biggest factor is that the average selling price of high-performance chips for AI is about five times that of conventional memory chips.
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This accelerated the winner-take-all trend in the chip space. It’s no coincidence that the two best-performing chipmakers in the world this year are two of NVIDIA’s major suppliers. TSMC posted a record net profit in its latest quarter and raised its revenue forecast for this year, while SK Hynix reported its highest operating profit ever. Recent quarter. Both companies reported third-quarter operating margins of over 40%, more than twice that of their peers. TSMC stock is up 80% this year, while SK is up a third.
That means the risk of falling behind is greater than ever. Samsung missed profit estimates for its chip business in its latest quarter, while Intel posted a record $16.6 billion loss, even as it made its own AI chips to compete with Nvidia. Intel also withdrew its forecast for 2024 sales of $500 million for Gaudi AI chips. To put this into context, Nvidia’s data center business, which makes AI chips, had revenue of $26.3 billion in the quarter that ended in July.
An oversupply of conventional memory chips is expected to further pressure prices and margins for these products in the coming quarters. High-margin AI chips are becoming the only way to compensate for that weakness. In the world of AI, led by Nvidia, the message to the world’s chipmakers is clear. “If you can’t beat that, join that supply chain.”
june.yoon@ft.com
