Meet Europe’s five top semiconductor plays

One sector above all other has emerged as the way to play explosive growth in artificial intellegence (AI): semiconductors. Leading-edge chips are vital in providing the computer power data-munching AI technology needs. 

While the Citywire Elite Companies Awards shortlist for the semiconductor industry contains no computer chip makers, many of the five companies stand to benefit significantly from this trend.

The list is made up of a combination of cutting-edge picks-and-shovels semiconductor plays along with two solar companies. What unites these two seemingly disparate types of business, both of which are classified as part of the semiconductor industry by Morningstar, is geopolitics, subsidies and silicon, which is the raw material for both computer chips and solar cells.

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Last year, anyone who was unaware how important both semiconductors and solar are to the world’s future got a wake-up call when the Biden administration in the US ushered into law two jaw-droppingly bold bits of legislation.

The Chips Act shovels $52bn into the semiconductor industry, while the deceptively named Inflation Reduction Act (IRA) heaps $370bn of government largesse on renewables.

Companies in Europe can benefit from the cash on offer. But perhaps more significantly, the stateside action has had a domino effect with the EU and individual European countries boosting or introducing their own funding promises for these industries.

Get the lowdown on the hottest AI plays among elite managers’ favourite shares here.

With government money has come government restrictions. Export of the most advanced chips and chip-making equipment is being restricted to China. This has particularly impacted Dutch shortlisted company ASML.

But as well as being a pain commercially, the geopolitical importance being given to this industry highlights how difficult key players’ products and processes are to replicate. For shareholders, that points to huge value creation potential.

Here’s the full Emea Citywire Elite Companies semiconductor shortlist. 

Source: FactSet. Price-to-earnings ratio and dividend yield based on 12-month forecast earnings.

We’ll start our exploration with two solar companies. And if you want to stay up to date on the shortlists, don’t forget to sign up for the weekly Citywire Elite Companies newsletter here.

Sunny side up

Western solar companies have long faced a major competitive headwind in the form of China’s industrial policy, which has championed its leaders in this field. However, times appear to be changing.

As well as last year’s landmark IRA in the US, and similar initiatives in Europe, restrictions have been put on many Chinese solar imports. These are often connected with accusation of the use of forced labour in the supply chain.

Europe’s solar plays stand to benefit.

One such business is Swiss-listed Mayer Burger Technology (CH:MBTN). The Elite Companies Awards shortlisted company makes solar cells using its own leading-edge technology. It is currently loss making but expects a massive increase in production to remedy this. From production volumes of 30MW, it moved to 321MW last year and expects to achieve 800MW in 2023.

Also on the shortlist is Germany’s SMA Solar Technology (DE:S92). The company designs and produces inverters: the widgets that turn solar energy into usable electricity.

SMA Solar, which has installed a total of 120GW of solar power in its time, expects the inverter market to grow by 21% a year from 2022 to 2026. To exploit this burgeoning demand, it plans to double production capacity to 40GW.

The company is also targeting massive growth opportunities in charging, storage and green hydrogen.

An original geopolitical hot potato

Shortlisted semiconductor picks-and-shovels play Aixtron (DE:AIXA) provided investors with an early example of just how politically sensitive its industry had become back in 2016 when the US regulator blocked the German company’s acquisition by China’s Fujian Grand Chip Investment fund.

The geopolitical importance of the group is matched by the importance of its products to customers. This is reflected in very healthy margins that are expected to rise as sales continue to grow.

MARGINS AND SALES GRAPH

Prospects for 2023 are encouraging with the company recently telling shareholders in its first-quarter results that because of ‘unabated strong demand and stable supply chains, management expects further significant growth with increasing margins and order intake for the entire financial year’.

The mind-boggling bit of kit that Aixtron makes that’s so sought after by semiconductor makers is metalorganic chemical vapour disposition equipment. Disposition involves layering insulating and conducting films of seemly impossible thinness (a few nanometres for bleeding-edge chips) onto a silicon wafer.

Chip shop

Dutch company ASML (NL:ASML) makes lasers so precise that they could ‘hit an apple on the Moon’, according to elite portfolio manager Arnaud Cosserat of Comgest.

ASML’s lithography technology is, though, used for the less poetic but much more practical purposes of etching staggeringly tiny semiconductors – down to about 10 atoms in size. This has been key to the semiconductor industry’s miniaturisation of chips, which has been vital in keeping step with Moore’s Law – a doubling in computing power every two years.

Many believe Moore’s Law may have run its course, but ASML’s equipment is no less important. The recent surge in demand for chips to power AI applications has sent the shares 36% higher this year.

The final shortlisted company, France’s Soitec (FR:SOI), makes the ultra-smooth silicon wafers that are the raw material for semiconductors. The company sells into the smartphone, car and data centre markets and recently topped €1bn of sales for the first time.

It expects a relatively flat year in 2023 as demand for smartphones drops back and inventories are cleared. But beyond this, the company has said it is preparing for a period of ‘hyper-growth’.