Buckle Up For Semiconductor Surge: Taiwan’s TSM Unleashes Game-Changing 3nm Chips

Shares of semiconductor firms since of the October lows have quietly led the financial markets higher. Buckle up, the best is yet to come. Executives at Taiwan Semiconductor Manufacturing (TSM) announced a week ago that mass production of next generation 3 nanometer chips will begin at its Taiwan campus.

These chips offer much improved performance, while sipping 35% less energy. The evolution is a big deal for the semiconductor sector. Investors should buy Broadcom (AVGO) .

Let me explain. Semiconductors are getting a really bad rap. They are being summarily lumped together as one big mess.

Some analysts even argue that there is glut of chips, and that the sector should be avoided as consumer electronics firms work through the bubble in demand caused by the pandemic. The foundation of this argument is based on half-truth. It’s true that the pandemic caused enterprises, students and many consumers to buy new computers, smartphones, desktop monitors, webcams and even fancy mice.

All of these gizmos used chips that were already in short supply. So, the companies that make the gear ordered even more chips. When the economy reopened and interest rates began to rise, demand for personal computers and smartphones slowed.

Then, starting in October 2022, computer companies such as Dell Technologies (DELL) , HP Inc. (HPQ) , and chipmakers Micron (MU) , Intel (INTC) , Advanced Micro Devices (AMD) , and Nvidia (NVDA) began to announce rising inventories. The iShares Semiconductor ETF (SOXX) holds shares of a broad mix of chip businesses ranging from fabricators and equipment firms, to specialty processor designers.

SOXX traded in the middle of October at $287, down 47% from the record high in January. However, led by shares of equipment and specialty firms, the exchange traded fund rebounded sharply to $400 in December, and now trades at $363. The semiconductor sector is not a monolith.

Bearish analysts and investors unwisely see the sector as it was in the 1990s, mostly dependent on the PC business and its peripherals. The chip sector today is much more broadly based. Semiconductors are key components in everything from toasters and washing machines, to light bulbs.

This evolution of the chip sector is about miniaturization, and connectivity. One of Apple’s new 3 nm chips contains 114 billion transistors. Intel’s first Pentium processor made in 1993 contained only 3.

1 million transistors, according to a note from Baillie Gifford, a United Kingdom asset manager. Newer, denser chips have made possible all sorts of things that seemed like science fiction only a few decades ago. Smartphones, super computers in the cloud, and software applications that use artificial intelligence to constantly evolve have changed the course of civilization.

The common denominator is more powerful chips, and faster communication networks. Broadcom is a connectivity company. The San Jose, Calif.

-based business is at the center of the semiconductor world because executives at the firm wisely in the early 2000s became serial acquirers of foundational digital and analog semiconductor intellectual property. The company review in September listed its active patent portfolio at more than 19,000. This important IP holds captive Apple, Samsung, HP, Dell, AT&T (T) , Cisco (CSCO) and many other communication giants.

Without Broadcom gear, connectivity is impossible. That’s why Broadcom is the big winner in the ongoing buildout of TSM’s cutting edge 3 nm chips. Technological advancement is not slowing, regardless of the state of the global economy.

Next generation microprocessors are a big part of the solution to upcoming challenges like AI, and connecting new device categories to disparate networks. Investors have noticed. The stock traded in October at $420.

At the current share price of $588. 43, Broadcom trades at 13. 5x forward earnings and 7x sales.

These metrics may seem dear; however, investors should be mindful of the business case for Broadcom. Investors should consider purchasing Broadcom on pullbacks. Investing can be intimidating, but it doesn’t have to be.

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