The semiconductor market is red hot with the world on a digitalization bender. The pandemic and "stay home" initiatives have conditioned the global economy to rely on technology more than ever before. This 100-nanometer virus has changed the world we live in, and the "new normal" is highly digitalized by chip transistors a fraction of that microscopic size.
Semiconductors, aka digital chips, are the backbone of technology. Chips drive everything from supercomputers to your electric toothbrush. 2020 has been a banner year for chip leaders like AMD (AMD), TSMC (TSM), and Nvidia (NVDA), which have exploded off their March lows.
Now that the global economy is beginning to recover, these semiconductor sharks are looking to expand their portfolios with two of the largest chip deals on record.
AMD & Nvidia Attempt to Extend Their Portfolio's
Nvidia announced it would be acquiring Arm Limited from Softbank (SFTBY) for $40 billion last month. If the deal goes through, it will be the largest chip deal in history, but first, it must get past the 3 major regulatory authorities including China, which could pose a challenge amid the reheating US-China trade war.
Nvidia's announced acquisition would significantly expand the enterprise's chip market control. Nvidia now primarily focuses on GPUs and is leveraging the technology's hyperfast computing power to develop "true AI." The purchase of Arm will give Nvidia a firm grasp on the CPU market and provide the combined company with a whole leg in the smartphone market door.
This AI-juiced semiconductor powerhouse and its visionary CEO, Jensen Huang, have proven that Nvidia is a force to be reconned with. Softbank's leader, Masayoshi Son, and his close ties with Huang catalyzed this ostensible "value deal" for Arm. Son is selling the business to Huang for a song at $40 billion, having bought the company for $32 billion in July of 2016.
This deal includes a significant amount of NVDA stock, which I believe is a big part of the reason that Son is selling the company at such a favorable price. He believes in what Nvidia can transform this business into and wants to be a part of the action.
Now, AMD is in late-stage acquisition talks with Xilinx (XLNX). This strategic acquisition would help the combined enterprise better penetrate the data center market. AMD's claim to fame is its more "affordable" CPU/GPU chips. These chips are becoming best-in-class as the company keeps itself ahead of the innovative curve.
Still, AMD has yet to break into the massive data center market like its top competitors. Acquiring Xilinx will better equip the enterprise for competition in this space.
Consolidation is a sign of a maturing market where the biggest and baddest players mark their territory. The semiconductor sector has an enormous amount of growth ahead of it as the 4th Industrial Revolution commences. Chip leaders like Nvidia & AMD want to ensure that they are positioned to advance their competitive edge through the Roaring 20s. As competition grows, the necessity for scale and portfolio breadth is essential.
TSMC (TSM), on the other hand, already controls the foundry market (chip manufacturing), with 54% market share. TSMC is the go-to chip manufacturer for Silicon Valley. This company is consolidating the chip foundry market, with all the most successful semiconductor businesses utilizing this innovation-driven manufacturer's core competencies.
TSMC has worked with more semiconductors than any other company in the world. They are working at the largest scale and with the most state-of-the-art technology to improve a firm's "design time, time-to-volume, time-to-market, and ultimately, time-to-revenue," according to TSMC investor relations site. Today, TSMC is the largest chip company in the world by market cap.
These three-chip powerhouses are going to change the world over the next decade, with developments of the next technological milestones like true AI, autonomous driving, and smart cities.
AMD, NVDA, and TSMC remain good long-term buys if you can stomach short-term volatility associated with the semiconductor space's high-beta growth-oriented nature.
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Xilinx, Inc. (XLNX) : Free Stock Analysis Report
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