The technology hardware business has a reputation for being highly cyclical and financially sensitive. However, the following three actions: Taiwan semiconductor manufacturing (NYSE: TSM), ASML Holdings (NASDAQ: ASML)and NVIDIA (NASDAQ: NVDA) – They have absolutely defeated the market this year, despite their hardware-focused businesses and a pandemic-fueled recession.
TSM Year to Date YCharts Total (Daily) Returns Data
What is their secret? Each of these companies plays in some of the best long-term growth markets for 5G computing and artificial intelligence (AI). While the COVID-19 pandemic is clearly affecting demand for certain technology products, 5G and AI careers are proving to be sectors where everyone continues to compete, and demand for these cutting-edge products is not slowing down.
But simply playing alone in growth industries is not enough. On top of that, these three companies also have profound competitive advantages over their rivals that have made them truly unstoppable stocks. This is how these three companies have built and maintained these killer perks, and why they should continue to win in 2020 and beyond.
Three technological actions with formidable moats. Image source: Getty Images.
Taiwan Semiconductor Manufacturing – The World’s Best Manufacturer
Taiwan Semiconductor Manufacturing just released its earnings report last week, and the results were something to behold. Consider this: Taiwan Semi’s largest segment is in the production of smartphone chips, which account for 47% of its sales. Amid the coronavirus recession, smartphone units are expected to decline in mid-adolescence by 2020. Worse yet for Taiwan Semi, it was prevented from sending chips to its second-largest client in Huawei from China starting on 15 May, due to new US trade rules.
However, despite all this, TSM delivered successful results for the second quarter, while increasing the orientation for the rest of the year. TSM now plans to increase its revenue by more than 20% this year, above the full-quarter guidance for the last quarter for mid-to-high teens.
What is TSM’s killer advantage that has allowed it to not only survive but thrive amid the calm of smartphones and the Huawei ban?
As the chips have gotten smaller and smaller and are packed with more and more transistors, they are hitting the limits of Moore’s Law, which states that the chips can become twice as powerful every 18 months to two years. Recently, the chips have become so small and densely packed that it has made manufacturing ever more difficult.
As the world’s leading foundry that manufactures different chips for a wide range of customers, Taiwan Semi was able to pool its collective knowledge and advance Intel (NASDAQ: INTC) in the race for a cutting-edge 7nm chip in 2018. As companies and entire countries clamor for leading chips to cement their own advantages, Taiwan Semi’s capabilities are now in extremely high demand.
So even when Huawei fell by the wayside, demand from other chip companies has easily filled the gap, leaving TSM’s outlook unchanged. And Taiwan Semi is not slowing down either; It hopes to switch to 5nm chips and sell them before the end of the year.
While other semiconductor manufacturers are still struggling to bring 7nm chips to market, it appears that the manufacturing gap between TSM and its rivals is widening, not narrowing.
ASML – Taiwan Semiconductor’s Leading Supplier
What enables efficient TSM scaling of smaller and smaller chips? Much of the credit goes to another company with its own advantage: ASML Holdings.
ASML is the sole provider of extreme ultraviolet lithography (EUV), a technology that took 20 years to create without the certainty that any company would do well. Fortunately, ASML managed to crack the code just in time for the 7nm node, when EUV would become a differentiator over multiple patterns. Since the technology was so difficult to achieve, ASML basically has a monopoly on EUV technology today.
EUV is very important because it dramatically reduces the number of manufacturing steps, which can be hundreds, that are necessary to produce small chips with billions of transistors. As such, ASML has seen huge demand for EUVs in the past two years, and note that these machines cost between $ 100 million and $ 150 million per pop.
Like TSM, ASML also had its second-quarter earnings release, and the results were impressive. Despite some delays in the first quarter due to logistical constraints, ASML management has left its initial positive growth projections for 2020 unchanged. Due to the opening of the supply chain, ASML experienced 35% growth during the First quarter, and if each shipment had been recognized within the quarter, quarter-over-quarter revenue growth would have been 50% even higher. CEO Peter Winnick said:
With significant continuous home and remote learning activities, segments like the data center and communication infrastructure continue to be strong. Demand for consumer-related electronic products, for example, smartphones may be under some stress in the short term due to the economic impact of COVID and our customers indicate they see continued strength in end markets that require advanced nodes. And this is reflected in our stable demand.
While overall electronics sales may be muted, companies are still aggressively rolling out 5G, and data center customers are investing to keep up with the work-at-home economy. That means that leading edge nodes enabled by ASML EUV technology should see constant demand, dragging ASML stock along with it.
NVIDIA: CUDA Keeps Competitors Away
Another action that has been triggered despite the pandemic is NVIDIA. Once again, NVIDIA is challenging the COVID-19 recession due to its competitive advantages within key segments that are doing well in the pandemic: video games and artificial intelligence computing.
NVIDIA emerged as a leader in graphics chips (GPUs) in the early 2000s, and 20 years and $ 20 billion in investment in research and development later, is an advantage that the company still maintains to this day. In a video game world that is much bigger now and continues to grow quite fast, NVIDIA’s gaming chip growth rate should accelerate amid the COVID-19 pandemic until next year.
However, in 2006, NVIDIA developed its CUDA platform, a unique architecture that combines hardware, software, and algorithms, opening GPUs to the parallel processing capabilities of other forms of data in addition to visual graphics. As a result, GPUs are ideal for AI accelerated computing capabilities that cannot be achieved with typical CPU processors alone.
The CUDA platform incorporates not only advanced NVIDIA chips but also system software, programmable algorithms, libraries, systems, and services. This first-motion interconnected walled garden deck provides a strong “moat” for NVIDIA compared to other competitive chips that may be more easily interchangeable. And NVIDIA continues to expand its moat under founder and CEO Jensen Huang, who continually reinvests in better and better GPUs, like the company’s new AI A100 chip introduced in May.
While the graphics segment is gearing up for the next wave of gaming consoles hitting the market later this year, NVIDIA’s data center AI chips are already taking off, with the company’s data center segment 80% year-on-year in the first quarter, despite the COVID-19 outbreak. Clearly, NVIDIA’s formidable position in these demand segments gives it a huge advantage in surviving the COVID-19 pandemic and thriving on the other side.
