Chips vs. Tech: A Tale of Two Sectors

The semiconductor sector has been on a roll, outpacing the broader tech sector in terms of revenue growth and market capitalization over the past five years. In 2021, the global semiconductor market size was $555.9 billion, with a compound annual growth rate (CAGR) of 12.1% from 2017 to 2021. In comparison, the broader tech sector had a CAGR of 8.5% during the same period. As of 2021, the market capitalization of the top five semiconductor companies (Intel, Samsung, TSMC, SK Hynix, and Micron) was $1.2 trillion, compared to $7.5 trillion for the top five tech companies (Apple, Microsoft, Alphabet, Amazon, and Facebook).



The chip sector's performance is driven by key factors such as memory chip market fluctuations, end market demand for PCs and smartphones, and inventory and fab utilization levels. In 2023, the memory chip market was the biggest swing factor, with sales dropping 31% (about US$40 billion) and expected to recover in 2024. End market demand for PCs and smartphones is also crucial, with both expected to grow 4% in 2024 after declines in 2023. Inventory and fab utilization levels are important indicators of the industry's health, with high inventories and low utilization expected to impact sales in the first half of 2024. In contrast, the broader tech sector's performance is driven by factors such as cloud/data centers, wireless, and automotive, with AI surging to the top position as the most important revenue driver.

Chip companies' valuations have evolved significantly compared to the broader tech sector. In 2021, the global chip market was valued at US$555.9 billion, with a compound annual growth rate (CAGR) of 12.5% expected from 2021 to 2026 (Fortune Business Insights). However, the industry experienced a downturn in 2023, with sales expected to be down 9.4% to US$520 billion. Despite this, chip sales are projected to bounce back in 2024, reaching US$588 billion, a 13% increase from 2023 and 2.5% higher than 2022's record revenues (Deloitte). This volatility highlights the cyclical nature of the semiconductor industry. For investors, this means opportunities for growth but also increased risk. As the industry recovers, chip companies may present attractive investment opportunities, but investors should also be prepared for potential downturns. Additionally, the increasing importance of AI and 5G technologies may drive future growth, but geopolitical tensions could complicate growth in the semiconductor industry.

The most promising growth opportunities within the chip sector are driven by emerging technologies and market trends. According to Deloitte, the market for chips that accelerate the training and inference of generative AI models was the semiconductor story of 2023, with sales predicted to reach more than US$50 billion in 2024, or 8.5% of the value of all chips expected to be sold for the year. This growth is supported by the increasing demand for AI chips, which are expected to reach US$400 billion in sales by 2027. Additionally, the automotive and data storage industries are expected to contribute significantly to the growth of the chip sector, with a combined 70% of growth predicted by 2030. In comparison, the broader tech sector is expected to grow at a compound annual growth rate of around 7% from 2021 to 2030, with the computing and data storage segment contributing the most to this growth.

In conclusion, while the broader tech sector has experienced significant growth over the past five years, the chip sector has outperformed in terms of revenue growth and market capitalization. As the semiconductor industry continues to evolve, driven by factors such as AI and 5G technologies, investors should keep a close eye on this dynamic sector for potential investment opportunities. Despite the cyclical nature of the industry, the long-term outlook for the chip sector remains positive, with promising growth opportunities on the horizon.