Morningstar - Q2 2021 - 67

EXHIBIT 1

Analyst Take Most of the semiconductor stocks mentioned here have moats; half were overvalued as of mid-April.
Name

Economic Moat

Price

Fair Value

P/FV

Morningstar Rating

Advanced Micro Devices AMD

Narrow

$80.19

$101.00

0.79

QQQQ

Applied Materials AMAT

Wide

$135.10

$103.00

1.31

ASML Holding ADR ASML

Wide

$629.12

$500.00

1.26

Intel INTC

Wide

$65.22

$65.00

1.00

QQQ

KLA KLAC

Wide

$344.13

$290.00

1.19

Lam Research LRCX

Wide

$644.99

$505.00

1.28

Micron Technology MU

None

$91.15

$80.00

1.15

QQQ

Nvidia NVDA

Narrow

$627.18

$400.00

1.57

Qualcomm QCOM

Narrow

$137.30

$136.00

1.01

QQQ

Samsung Electronics 005930:KR

Narrow

SKW 84,000.00

SKW 79,000.00

1.06

QQQ

Taiwan Semiconductor Manufacturing ADR TSM

Wide

$121.27

$136.00

0.89

QQQQ

Tokyo Electron 8035:JP

Narrow

JPY 49,910.00

JPY 34,000.00

1.45

Source: Morningstar Direct. Data as of 04/14/2021.

administration was very adamant on trying
to limit China's edge in 5G, with the Huawei ban,
and in artificial intelligence, via bans on
U.S. chip companies selling some equipment and
chips to Chinese firms. I think that for the
U.S. to remain in the leadership position, it does
need to invest in its own ecosystem. China
is still going to have a big impact in the supply
chain, but COVID has helped companies
realize that they can't have all their eggs in
one basket.
But then, China is also a huge demand driver.
For example, that's where a lot of the iPhone
growth has happened in the last couple
years. China's a very important end market. For the
U.S., it's a delicate balance of playing hard
and tough with China while also making sure that
U.S. companies can still sell into there.
Lallos: The industry comprises three different kinds
of companies: designers, chipmakers, and the
companies that provide equipment to the chipmakers.
Is one of these areas better for building and
maintaining moats?

Davuluri: The equipment side. There's been
consolidation in all of these particular
verticals, but the equipment side has seen a ton

of consolidation, and that speaks to how
difficult it is to make the tools that actually make
the chips. The five major equipment firms
I cover account for about 70% of total equipment
spending, and that number is likely to
keep increasing.
Applied Materials AMAT, Lam Research
LRCX, KLA KLAC, ASML ASML, and Tokyo Electron
8035:JP span the overall manufacturing
process and sell basically all the tools to make
those chips. They rely on existing relationships
with advanced chipmakers. They work
very closely with their customers to identify
problems, and that creates a positive
feedback loop where they can take what they
learned from a previous generation and
then implement it in new products. That makes
it difficult for startups or smaller firms to
break in. The equipment side of things is probably
one of the most difficult for China to replicate,
and it's probably going to be at least five
years, if not longer, before they're able to be
competitive at the leading edge. As for
the chipmakers and the designers, there was
a time when most companies did both:
physically making the chips that they designed.
But manufacturing chips has become

expensive; you need to have scale and volume
of chips to make it practical from an
economic standpoint. The leader here is clearly
TSMC, which has leapfrogged Intel in
recent generations. They make almost every
single smartphone chip in the world-about 70%
to 80% of that market-especially at the
leading edge. That is a lot of volume that has
helped them fuel stronger demand, which
allows them to keep investing, and that virtuous
cycle has benefited them.
Intel is the U.S. leader, but they have had some
manufacturing challenges in recent years;
they have a wide moat but a negative moat trend.
Samsung 005930:JP is in the middle. They
are similar to TSMC, though not quite as leadingedge in terms of technology, but they also
make a lot of chips for themselves, like Intel. Those
are pretty much the only three firms that can
do leading-edge manufacturing.
The chip designers have a lower barrier
to entry and are the least moatworthy of
the three. Companies like Apple and Tesla TSLA
and even Microsoft and Amazon have
gotten comfortable with hiring their own
chip designers.

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Morningstar - Q2 2021

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