Annabelle Miller
Artificial intelligence (AI) chatbots, like ChatGPT and Bard, are the beginning of the next wave of computing. But investors should consider opportunities along the supply chain in order to make the most of the opportunities, according to ECP Asset Management’s principal, investments, Annabelle Miller.
“At this early stage of innovation, it can be hard to pick who will thrive and survive, and who will take an early lead but then disappear. We’ve seen it many times in the past, when first movers become historical footnotes. For example, companies such as Blackberry (then known as Research in Motion) dominated the mobile phone market for a period but is now almost unheard of.
“Therefore, investors looking for quality, long-term investments would be better served looking at the companies that supply essential products to these companies, as they will prosper regardless. This is known as a “pick and shovel” approach – investing in companies that produce the tools required by others.
“For example, to commercialise products such as ChatGPT and Bard, more powerful semiconductors will be required to run the computational workloads.
“Companies supporting semiconductor businesses are a toll-road on the capital investment undertaken by TSMC, Samsung and Intel as they expand semiconductor manufacturing capacity to meet market demand over the next decade,” Ms Miller says.
Many semiconductor companies had a volatile 2023, as the industry went through a large inventory correction due to the “bullwhip effect”, following COVID supply chain disruptions.
“We would argue that while semiconductors may be overhyped, they are overhyped for a very good reason. It is an industry that is growing but also an industry that is highly cyclical and these dips provide buying opportunities,” Miller says.
“One company positioned well in this landscape is Japanese manufacturer of semiconductor industry testing equipment Advantest which provides testing to major semiconductor players Nvidia and AMD.
The semiconductor testing industry is highly concentrated and effectively a duopoly (Teradyne is the other major player). Industries like this are particularly attractive because of their pricing power – due to barriers to entry – which enables superior returns on capital and equity.
“Another interesting story is that of ASM International which now produces atomic layer deposit (ALD) machines. These machines are mission critical in the fabrication of chips and allow a very thin uniform layer of chemicals to be deposited on a semiconductor chip which changes the electrical conductivity and boosts the power characteristics of a chip,” Miller says.
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