How to play the demand for microprocessors as chatbots, robots and EVs disrupt sectors

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While industrial automation showed the way during the pandemic – moving goods at a time of lockdowns and labour shortages – COVID-19′s impact on digital automation and the way people interact with technology may have a more lasting effect.

Analysts say the excitement around ChatGPT, the user-friendly interactive chatbot that Microsoft Corp. MSFT-Q is building into its Bing search engine and Edge internet browser, is one example of the trend. While the focus of attention is on how ChatGPT answers complex questions in a user-friendly interactive way, they say a bigger story – and investment opportunity – is in the powerful microprocessors that make it all work.

“ChatGPT and smart chatbots have created a whole new level of disruption,” says Mark Noble, executive vice president of exchange-traded fund (ETF) strategy at Horizons ETFs Management (Canada) Inc. in Toronto. “ChatGPT is a watershed moment because what it’s effectively signalling is the potential for true white-collar disruption.”

Mr. Noble says robots and automation changed the factory floor by shifting repetitive jobs to machines. He sees ChatGPT as having a similar disruption affecting service jobs. If tools like it can answer complex questions, “it replaces a lot of the mundane work that’s done by service workers.”

ChatGPT was created by OpenAI, a software company in which Microsoft has a big stake. The technology has been developing for years but the breakthrough is in the human-like responses to text queries that are delivered in an intuitive, conversational way.

The engine driving the interaction is microprocessors. They come in many forms, including simple memory chips that store files on computers or save digital photos to complex chips found in electric vehicles that guide factory robots, facilitate cloud computing and crunch big data.

Performance of chipmakers

That sense of opportunity has bid up the price of leading chipmakers this year.

Nvidia Corp. NVDA-Q is up 85 per cent year-to-date. It’s best known for the graphic chips used in gaming systems but is also a leader in the chips used in cloud-based computing, self-driving cars and drones. A growing area is the processors used by cryptocurrency miners.

Netherlands-based ASML Holding NV ASML-Q, which has a near monopoly on the manufacturing of the machines that make sophisticated chips, is up 17 per cent this year. Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) TSM-N, the world’s most valuable chip company, is up 25 per cent.

Mr. Noble says the pandemic helped spread the use of industrial robots but did not help the profitability of the manufacturers, many of whom are based in Asia. They faced two years of uneven performance because of sporadic factory shutdowns and supply chain disruptions. That made it difficult to get components and finished products.

Therefore, 2022 was a poor year for the sector, compounded by the broader market decline.

Horizons Robotics and Automation Index ETF RBOT-T was down 44 per cent for the year, while Horizons Global Semiconductor ETF CHPS-T, with a sharper focus on microprocessors, was down 38 per cent. Both have rebounded and are up by double digits this year.

Sylvia Jablonski, chief executive officer and chief information officer of Defiance ETFs LLC based in New York, says that as pandemic-related pressures have eased, the industrial automation sector has returned to near-normal conditions. The lesson for manufacturers has been to be prepared for the unexpected, she says.

“We learned if something like the pandemic were to happen again, we can’t rely on the physical presence of people in a warehouse,” she says. “And that the solution is automation.”

Defiance markets a suite of disruptive innovation ETFs including Quantum Computing & Machine Learning ETF QTUM-A. It fell 29 per cent in 2022, but like the Horizon ETFs, it has rebounded with a 14 per cent gain this year. The ETF holds Nvidia, TSMC and ASML among its 71 stocks. Horizons Global Semiconductor ETF holds these companies as its top three positions.

Ms. Jablonski notes that large-capitalization companies are well placed to maintain an advantage because of the high cost of research and development, which plays to their financial strength. She says that TSMC makes 56 per cent of the world’s semiconductors, playing a huge role in things like driverless cars. Microsoft recently invested US$10-billion in OpenAI.

She adds that companies like International Business Machines Corp. IBM-N and Hewlett-Packard Co. HPQ-N are developing supercomputers to compile data and use artificial intelligence (AI) to interpret it.

Diversification is key to success

Neither Mr. Noble nor Ms. Jablonski believes the Biden administration’s plan to repatriate chip-making should influence investor decisions. The CHIPS and Science Act authorizes up to US$200-billion in subsidies over 10 years for companies manufacturing semiconductors in the U.S. The analysts argue the plants take years to build and commission and the development is a strategic industrial policy goal of keeping the U.S. a contender in the global chip race.

Both agree the landscape is changing rapidly, so one strategy for investors is baskets of stocks rather than trying to pick winners.

“The first smartphone my dad brought home was a PalmPilot. I loved that thing,” Mr. Noble says. “Who would have thought that a company that effectively had 40 to 50 per cent market share of mobile handheld devices would no longer exist?”

In technology, diversification is the key determinant of success, he adds.

As for the size of the opportunity, Ms. Jablonski points to research by the electronic industry trade association IPC International Inc., which forecasts the market for AI-related software to grow at 37 per cent a year through 2026.

“That’s a massive opportunity,” she says.

Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.

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