Daniel Pilling, a technology analyst at Sands Capital with a focus on semiconductors, dives into the explosive growth of the semiconductor industry, driven by AI and machine learning. He explores the intricate history from vacuum tubes to today's advanced chips and discusses the complexities of manufacturing processes. Pilling highlights Entegris's critical role in supplying essential materials and the unique challenges and opportunities faced in this rapidly evolving market, suggesting that investment strategies should avoid betting on single winners.
Entegris plays a crucial role in the semiconductor supply chain by providing essential chemicals and filtration systems that support advanced chip production.
The semiconductor industry's growth is heavily driven by the demand for AI and machine learning, highlighting the importance of continuous innovation and complexity in manufacturing.
Deep dives
The Ubiquity and Evolution of Semiconductors
Semiconductors have become essential components in modern technology, present in countless devices ranging from smartphones to vehicles. The industry's growth over the past several decades has been driven by an insatiable demand for compute power, which has been growing at an estimated rate of 50% per year. Historical technological advancements, defined by cycles such as the mainframe, PC, smartphone, and the rise of AI, showcase how each development has relied on increasingly sophisticated semiconductors. Moore's law, which predicts the continual miniaturization of transistors, has enabled more powerful chips within smaller physical spaces, exemplified by the transformation from early bulky vacuum tubes to today's advanced microprocessors that fit millions of transistors on a chip smaller than a human hair.
The Complex Semiconductor Manufacturing Process
Semiconductor manufacturing involves a highly intricate process that begins with a silicon wafer, through which a series of steps include lithography, deposition, and etching to create microchip architectures. Each step requires precise technologies and materials, and companies like ASML play a pivotal role as the monopoly supplier of lithography equipment. The demand for advanced chips has increased complexity in production, necessitating specialized chemicals and filtration processes to ensure the purity needed for tiny transistor sizes. As manufacturing technology advances, the yield becomes more challenging, with the introduction of techniques such as 3D architectures requiring more sophisticated tools and materials, which ultimately raises production costs.
Investing in the Semiconductor Supply Chain
The semiconductor manufacturing sector is characterized by a consolidated supply chain, where a handful of companies dominate key areas, making it challenging for new entrants. The cyclical nature of the industry is influenced by the imbalance between supply and demand, with demand rising sharply in line with innovations such as AI and autonomous systems. Integris stands out in this landscape as it provides crucial consumables—filters and chemicals—that are indispensable throughout the chip manufacturing process. Its strategic role in the supply chain offers a unique investment opportunity, as it benefits from increased demand without being tied to a specific manufacturer, thereby hedging against the inherent volatility of the cycle.
Integris: A Unique Investment Proposition
Integris serves as a vital supplier in the semiconductor ecosystem, primarily focusing on chemicals and filtration systems essential for producing advanced chips. The company has positioned itself to take advantage of the increasing complexity and demand for semiconductor materials, given the trend toward smaller and more efficient transistors. Integris's business model, which emphasizes being a single-source supplier for multiple needs, creates significant switching costs and deep relationships with clients. The granularity of their offerings aligns well with the evolving demands of the semiconductor market, especially as innovations in AI and IoT fuel a growing need for both leading-edge and trailing-edge chips.
You’ll find semiconductors in just about every device with a plug, a power button, or a battery. In this episode of What Matters Most, Sands Capital research analyst Daniel Pilling explains why Entegris, a critical player in the global semiconductor industry, is seeing rapid growth as the demand for artificial intelligence (AI) and machine learning intensifies.
(00:01:37) From vacuum tubes to artificial intelligence (AI) in 80 years—a quick history of semiconductors
(00:04:51) How small is a nanometer really? Moore’s Law in action, shrinking chip circuitry.
(00:07:33) Exponential complexity in chipmaking. Skyscrapers and bread?
(00:09:00) But actually, how do you make a semiconductor?
(00:15:18) Entegris: chemicals or technology analysts? Who covers it and why?
(00:18:56) “One throat to choke”? And the chokepoint explained.
(00:26:28) Why consumables have less “lumpy” capital expenditures
(00:26:51) Chips that power EVs [electric vehicles]
(00:30:22) Don’t bet on the winner in this market, and what to do instead.
(00:33:57) Advantages and industry talent finding an employer of choice
(00:40:32) The iPhone moment and where AI is going from here
(00:42:17) Outlook for Entegris and semiconductor growth
