You may have heard of ChatGPT, the artificial intelligence-powered chatbot recently released to the public by startup OpenAI. Released on November 30, the shockingly good AI chatbot reached 1 million users within five days. After ChatGPT’s release, college professors now fear the rise of AI-generated college subjects, and software developers may fear the rise of ChatGPT’s AI-generated coding capabilities.
Microsoft (MSFT 3.57%) has already invested $1 billion in OpenAI in 2019, and the cloud giant is now reportedly in talks to invest another $10 billion in the company, so obviously this new, The latest AI engine shows great promise. Last week, Microsoft released an OpenAI service on its Azure platform, which developers can now incorporate into their software designs, and Microsoft itself is bringing ChatGPT capabilities to its existing software products, from Office to Bing. Trying to add. Last week at the World Economic Forum, Microsoft CEO Satya Nadella claimed that AI would become mainstream “in months, not years.”
As AI now appears to be reaching a threshold where it’s at stake in a wide range of enterprise and consumer applications, it’s safe to say that every major tech company is now investing heavily in AI to compete. Will invest more.
If AI wars are starting, that means some “arms dealers” — the semiconductor companies that make AI work — should have huge profits, perhaps even more than Microsoft or other big tech platforms.
As he says, it was the producers of picks and shovels who became richer during the California Gold Rush in the 1800s, even more than the prospectors themselves. Applying this logic to AI, the following “picks and shovels” semiconductor stocks should benefit greatly in the coming years.
Running artificial intelligence requires the massively parallel processing capabilities of graphics processing units (GPUs), and GPUs are the absolute leader. Nvidia (NVDA 6.41%). Interestingly enough, ChatGPT doesn’t even currently run on Nvidia’s latest chip, the H100, or “Hopper,” which was just released late last year. Rather, the current incarnation of ChatGPT runs on older A100 chips, released two years ago.
If you think ChatGPT is impressive now, get ready. The H100, which began shipping in October, is expected to perform AI “training” functions at nine times the speed of the A100, and “inference” — an AI process that reacts to a question or other stimulus. is — 30 times the speed. In addition, the H100 promises 3.5 times better energy efficiency and three times lower total cost of ownership.
Nvidia is also unveiling its first CPU this year called Grace, designed specifically to work with Hopper and Nvidia’s networking-based data center processing units (DPUs). Together, these complete AI systems should enable the movement of data within the system, in addition to ultra-fast networking and ultra-fast GPU processing.
While Nvidia’s gaming chip revenue fell due to the video game pandemic and cryptocurrency bear market in the recently reported third quarter, its data center revenue rose 31%. With the launch of the Hopper H100 chips and the start of the AI wars, look for Nvidia to take advantage in 2023. This is especially true when its stock has traded at a more reasonable price since its 50% decline in 2022.
Taiwan Semiconductor Manufacturing and ASML Holdings
The production of Nvidia GPUs depends on these two foreign companies, Taiwan Semiconductor Manufacturing Corporation (TSM 2.98%) And ASML Holdings (ASML 2.95%). You might recognize TSMC as one of Warren Buffett’s recent stock picks, as the Oracle of Omaha bought $4 billion worth of stock last summer.
First at ASML, which has a monopoly on a key technology used to produce leading-edge semiconductors, called extreme ultraviolet lithography (EUV). As leading chip companies began to manufacture semiconductors with transistors spaced below 10nm, the ultra-fine lasers of EUV technology became essential. Given that artificial intelligence applications require the most transistor-dense, power-efficient chips to run, the escalating AI wars will demand chip foundries to produce more and more leading-edge chips. This means more purchases of ASML machines.
Of course, there are many more steps to making a critical chip than just lithography. Lithography must work in tandem with masking equipment, etch and deposition machines, metrology and inspection machines, and advanced packaging to create these incredibly complex chips flawlessly.
it really is, Really Hard to do, and that’s why Taiwan Semiconductor has a competitive moat of its own thanks to its years of experience as the world’s largest outsourced foundry. Years ago, it surpassed TSMC Intel (INTC 2.81%) in developing leading-edge chips, and that only appears to widen the lead given TSMC’s size and scale advantage, as well as Intel’s current struggles with exposure to a weak PC market. As of the fourth quarter, TSMC produced more than 56% of the world’s semiconductors, with an even greater share at the leading edge.
On its recent earnings call with analysts, TSMC management emphasized its high-performance computing segment for AI users as the reason for its optimism on a recovery in the semiconductor market in the second half of 2023.
Therefore, both ASML and TSMC work together, but both have a competitive advantage in producing the most advanced chips needed for AI processing. Value investors such as Buffett may gravitate toward undervalued TSMC, which trades at just 13.7 times earnings. Meanwhile, growth investors may be drawn to ASML’s technology monopoly, asset-light business model, and smooth growth prospects, which have led to a higher valuation of 42 times earnings.
Finally, all this data processing requires large amounts of memory and storage, which should benefit memory producers. Micron Technology (MU 3.73%).
Micron’s results are currently in freefall and its earnings are likely to be negative for the next two quarters, as a historic decline in PC sales along with weakness in smartphones and consumer electronics hit the memory market’s delicate supply-demand balance. Overwhelmed.
Still, Micron’s stock has remained miraculously resilient, almost at the level it reached last June, even as its results have soured greatly. That’s because the stock now trades just above Micron’s book value, and the market tends to be bullish. Meanwhile, Micron is one of only three global players that manufactures DRAM memory at scale, and one of only five players that manufactures NAND flash storage.
With limited competition, both Micron and peers SK Hanks has announced a sharp cut in spending for 2023, which will help restore the supply-demand balance in the back half of the year. While the leader Samsung Having said late last year that it wanted to maintain its investment in memory chips despite the downturn, analysts are now skeptical that it will do so, especially after worse-than-expected fourth-quarter earnings. In the context of being. In fact on January 16 Digitimes It has been reported that Samsung will reduce some of its NAND production, perhaps due to this situation.
Also, Micron had a technology lead over this limited competition last year. In just the past six months, Micron became the first memory maker to acquire 1-beta DRAM chips and the first to produce 232-layer NAND flash chips. With the current technology leading and all market participants now appearing to be cutting production, Micron should benefit in the back half of 2023 and beyond, as demand for memory-rich AI servers remains high.