Thread by @FabiusMercurius

📀Semiconductor Industry Primer💿

Semis are 🔥🔥 in 2021! But how to trade ‘em?
Hot take: chips are commodities. Trade like oil, not tech.
👇
1 Ecosystem overview
2 Supply chain
3 Key drivers
4 Key Metrics
5 Macro catalysts
6 What's going on in 2021? COVID run-up & sell-off 📈📉

1/ Ecosystem

Semis trade like oil. Calling them "tech" is just deceiving.
What separates gurus from newbs isn’t knowing about wafers. It’s understanding the global value chain & drivers of supply/demand.

Here's a market map of key players & where they sit in the supply chain.

First, slice the ecosystem:
👉by component type (Memory, Logic, µP, Analog)
👉by end-market (Comms, PC, Consumer, Industrial, Auto)

Then identify top players per component product & per end-market.

Then trace demand flow:
from component type (source) ➡️ each end-market (dest).

Geographical Distribution:

Top Players

Intel: Biggest IDM. #1 in µprocessors
TSMC: #1 foundry, ~59% mkt share
Samsung: #1 in DRAM, NAND. LTE modem supplier to AAPL
Broadcom: #1 in network infra (WLAN, BT, GPS, FM, NFC)
Texas Ins: #1 in analog ICs. Big supplier to autos + industrials
Nvidia: #1 in AI GPUs

2/ Supply Chain

From transistors --> iPhones, self-driving cars, & PS-5s...
How do we get there?

1st stop: Chip Design (2 strategies)
- Fabless designers (e.g. Nvidia, Xilinx) outsource manufacturing to dedicated foundries & enjoy higher margins + low capex
- IDMs (e.g. Intel, Texas Ins.) are vertically integrated; design & manufacture in-house for higher operating leverage

2nd stop: Manufacturing & Testing
- Foundries (e.g. TSMC, SMIC) do the actual wafer processing, assembly & hardware testing based on designer specs
- most IDMs outsource at least part of their manufacturing

3rd stop: Chip Distribution to Equipment Manufacturers:
- Distributors (e.g. Avnet, Arrow) perform 3 main functions:
a) carry inventory to smooth supply
b) handle import logistics internationally
c) reach smaller equipment manufacturers that chip designers don’t service directly

4th stop: Equipment manufacturing
- ODMs: perform electronics manufacturing on behalf of OEMs
e.g. Foxconn, Jabil
- OEMs: design & market branded electronic products to end customers and service providers (some verticalize the manufacturing in-house)
e.g. IBM, HP, AAPL

5th stop (final): Distribution to end-markets
End customers include:
- Electronics Retailers (B2C)
e.g. Best Buy, Walmart, Amazon
- Industrial conglomerates
e.g. Rockwell, Siemens
- Autos
e.g. Tesla, Toyota
- Governments

3/ Key Drivers

Supply & demand (cyclicality)
4-stage cycle lasting ~3Y: (1) strong market w/ capex expansion → (2) downturn w/ excess capacity & price softening → (3) weak markets w/ low capex investment →(4) upturn w/ price firming

- Geopolitics (US-China tension)

4/ Key Metrics to Watch
- Total industry-wide sales
- ASP (avg selling price)
- Gross margin (avg ~50%)
- Inventory
- Capex Spending

No-longer Tracked Metric
- Fab utilization % (this metric used to be a leading indicator of producers’ margins but SICAS stopped report in 2012)

5/ Catalysts & Tailwinds

- AI craze spurs demand for GPUs & FPGAs
winner: NVDA
- 5G, faster connectivity craze
winner: Broadcom
- Wearables/IoT craze
winner: TXN, Intel
-US/China Tensions
winner: SMIC
- Biden’s $50B pledge to expand chip manufacturing
winner: all US vendors

6/ So what happened in 2020-2021?

1. COVID forced fabs to shut down, tightening supply
2. WFH forced IT changes, spurring demand
3. Gah! A global chip shortage!
4. Prices ⬆️. “Chip profits must 📈!” said the market in Feb
5. Volumes ⬇️. "Profits must 📉!" said the market in May