With market euphoria and artificial intelligence (AI) pushing Nvidia to record highs, investors keen to profit from the huge demand for computer chips should consider suppliers to the industry, which are also benefiting from rising demand for semiconductors, according to Annabelle Miller, principal at ECP Asset Management.

“With Nvidia and artificial intelligence (AI) now dominating headlines, it is very important for investors to not get carried away with market euphoria. Now is the time to focus on high-quality companies with strong fundamentals that are positioned to benefit from the huge growth in long-term demand for semiconductors,” Miller said.

“Quality companies such as Advantest and Dutch company ASM International (ASMI), for example, are market leaders in their fields and their earnings are growing as they are key suppliers to leading semiconductor manufacturers such as Nvidia and AMD, with rising demand triggered not only by AI products such as ChatGPT, but the growing worldwide demand for advanced computer chips generally,” according to Miller.

“ASM International shares have gained around 1000 per cent in five years, while Advantest has gained around 650 per cent in just five years, with both companies outperforming all of the ‘Magnificent 7’ companies other than Nvidia. While our expectations for future returns have come down somewhat, we still view these companies as extremely high quality businesses with a long runway of growth ahead of them,” said Miller.

“Both AMSI and Advantest may be better positioned to withstand market volatility. Neither carry the same degree of technological risk or product failure as Nvidia or AMD, but both benefit from the rising global spending on semiconductors,” she said.

According to Miller, ASMI and Advantest are the ‘picks and shovels’ of the semiconductor industry, which continues to advance Moore’s Law. This is the observation that the number of transistors on a computer chip will double every two years with a minimal rise in cost, rapidly reducing the cost of computers. ASMI is a market leader in atomic layer deposition (ALD) technology, which is used to create logic and memory chips, critical to semiconductor production. Advantest operates as part of a global duopoly focused on semiconductor testing, which is critical in the semiconductor supply chain.

“ASMI holds significant market share, and it is among the fastest-growing segments in the wafer fabrication equipment market, critical to semiconductor production. ASMI is a key supplier to leading global foundry, TSMC, and is enjoying strong earnings growth and widening profit margins as investment pours into semiconductor production. So, it is a growth company, but quality too.

Advantest has a critical role given the semiconductor testing process is a critical process used to improve semiconductor yields. “The growth in test intensity is underpinned by greater semiconductor complexity and production. The close relationship with the end customer from the beginning of the product development journey underpins Advantest’s competitive advantage,” said Miller.

“By focusing on high-quality businesses such ASMI and Advantest investors can gain exposure to the structural growth tailwinds of the semiconductor sector without the same degree of technological risk or product failure. These companies are likely to keep generating large amounts of cash that can be reinvested back into their businesses. They are well positioned to ride out the volatility of stock markets and remain resilient in the face of both known and unknown challenges.”