Digital Transformation Play in Semiconductors
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Digital Transformation Play in Semiconductors

Investors can learn a great deal from market volatility. Gut-wrenching ups and downs expose weak hands. Twists and turns reveal which investments are truly safe.

It’s important for investors to seek out those safe investments. For example, look at giant tech platforms like Microsoft Corp. (Nasdaq: MSFT), Alphabet Inc. (Nasdaq: GOOGL) and NVIDIA Corp. (NVDA); all have barely budged in the recent tech tumult.

The share prices of all public companies are governed by constituencies — true believers, for lack of a better phrase. These investors are committed, never panicking, even when the investment thesis seems to be in short-term doubt. Volatility exposes the true size of that base.

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Let me give an example.

Square, Inc. (NYSE: SQ) is a popular, fast-growing business. The San Francisco-based company provides digital financial services to small businesses. The company is hip and seems to have a large constituency of institutional investors. Yet shares did not hold up well in the recent volatility, sliding 25% since cresting near $280 in April.

Momentum investors bailed on Square when the company’s large position in Bitcoin (BTC) got cut in half. Longer-term investors seeking exposure to digital financial services would have been better off owning PayPal Holdings, Inc. (Nasdaq: PYPL), down 16%, or Intuit Inc. (Nasdaq: INTU), up almost 5% during the same time frame.

The carnage told us that too many Square holders saw the stock as a Bitcoin play, largely explaining recent volatility.

But thanks to the digital transformation, there will always be great plays in tech.

And that brings me to the incredible opportunity in semiconductors that investors need to know about. Microprocessors are an extremely important part of digital transformation, yet not all silicon companies are the same.

NVIDIA and Taiwan Semiconductor Manufacturing Co. Ltd (NYSE: TSM) are positioned well for a future filled with bespoke designs from nontraditional players such as Amazon.com, Inc. (Nasdaq: AMZN), Apple Inc. (Nasdaq: AAPL) and Alphabet.

Others make the equipment needed to retool giant-chip factories for those custom architectures.

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One of the most prominent companies in this area is Applied Materials, Inc. (Nasdaq: AMAT). It reported second-quarter earnings on May 20 that blew past expectations. Managers said Q3 revenues would be up 35% year over year and that revenue momentum is building as big buyers like Taiwan Semiconductor and Intel Corp. (Nasdaq: INTC) feverishly retool to meet rising demand.

Keep in mind that Applied Materials is the world’s largest supplier of equipment. Its wafers and materials are used in every aspect of the manufacturing process except lithography.


 

Business is booming. More importantly, based on the price action since February, we know the constituency for Applied Materials shares look very solid.

Savvy investors should strongly consider buying shares into any near-team weakness.

Best wishes,

Jon D. Markman

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