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My Attempt to Understand What Semiconductors Do
Part of my process to understand $TSM is to look at semiconductors. Here is an attempt to explain them like I am five. I know there are smarter people than I so please bear with me.
Semiconductors, such as memory chips or processors, are the nervous system of almost every piece of hardware on the planet. Without semiconductors the world would grind to halt. Needless to say we need them, and they remain critical to almost every industry in the world.
So what are semiconductors? Here is my explanation like I am 5.
Think of a toy that can become red or blue. But to change the color, you need to blow on it hard rather than use your hands.
A semiconductor is comparable to this toy.
It's a unique substance that conducts electricity or stops it depending on how you handle it. The semiconductor becomes more conductive to electricity when specific substances are added to it or when it is heated.
Nevertheless, if you eliminate those factors or chill it down, it becomes more difficult for electricity to flow. Making electrical gadgets like computers and phones requires the capacity to quickly flip between conducting and not conducting.
We could consider semiconductors the closest thing humans have created to magic. We are dealing in the micro-realms, one-hundred-millionth of a meter. The most cutting edge, the 3nm chip, possesses almost 300 million transistors per square millimeter.
Chips are produced in specialized Foundries or Fabrication Plants (fabs). Most of the largest semiconductor businesses today are ‘fabless’, designing chips and outsourcing production. The largest fabless companies include $AAPL, $AMD, $NVDA, and $QCOM.
With increasing costs and the specialization associated with the design and fabrication of leading-edge chips, many companies now specialize in single value chain steps. The largest global producer of semiconductors is Taiwan Semiconductor Manufacturing Company $TSM.
Excellent summary Dave, I liked the 5 year old explanation haha
@giuliano_mana thanks! Maybe now I can move to the 6-8th grade explanation 😂😂
I love these jargon free explanations, thanks Dave. Would be insightful to know what you think are the biggest threats to $TSM
@joeyhirendernath thanks Joey! I appreciate the kind words 🙏. I am working on just that and hopefully can post something this weekend. It’s a great biz for sure.
Well done!
Some might dismiss the approach and say a prudent investor should stick to their circle of competence. And I do that with the majority of my portfolio. But I like how you say that your ongoing learning about semiconductors is part of your work on $TSM. For those of us who love learning, the stock market offers infinite opportunities to learn about some new corner of the world. I particularly like to do this with biotech companies. :)
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