The semiconductor market is about to get interesting.
At the Semicon event in San Francisco this week, a group of analysts speaking on a panel agreed on one point: Trends like artificial intelligence, machine learning and autonomous vehicles will produce a new set of winners and losers in the chipmaking world.
"In baseball nomenclature, it's the top half to the first inning," said C.J. Muse of Evercore ISI.
Reinforcing the oft-cited maxim that 'data is the new oil', Muse pointed out that today's market cap leaders -- Apple (AAPL) , Amazon (AMZN) , Alphabet (GOOGL) , Microsoft (MSFT) and Facebook (FB) -- manage vast amounts of data. And as demands for data storage, memory and computing power swell even further, semiconductor consumption is poised to explode.
"Things are going. to grow very fast, and AI is a very strong driver," said Pierre Ferragu of New Street Research. "Growth in semiconductors has been mostly driven by smartphones. Now, if you look at AI and how it's going to drive growth in the value chain, it's going to be bigger than smartphones. Car chips use the same amount of silicon as 5-15 iPhones; that's a lot of silicon."
Ferragu cited Applied Materials (AMAT) , ASML Holdings (ASML) and Lam Research (LRCX) as companies that have grown "twice as fast" as some others in the space, and that big players may get even bigger: "Over the next 7 years, I expect the industry to grow at least as fast, a capital-intensive effect will increase, and the top manufacturers to grow twice as fast," he said. "As they do that, they will become monopolies."
Nvidia (NVDA) , which has reported $3 billion in annual revenue from AI and machine learning, up from virtually zero as of three years ago -- was cited by panelists as evidence that opportunities for chipmakers are increasing substantially as demands for AI and high-performance computing grow.
But it won't be a gravy train for everybody.
Factors like rising manufacturing costs may put pressure on smaller chipmakers, forcing more consolidation in the sector, said Morgan Stanley's Mark Edelstone: "It's our expectation that about half of these blue companies will basically go away, and it will leave us with a few very broad, diversified and very valuable semiconductor companies."
Unpredictability from regulators is another "wild card," Edelstone said.
"There's obviously a big concern out there is you don't know what you can't control, like what we saw with Qualcomm and Broadcom, with the President blocking the transaction. The regulatory environment becomes a bit of a wild card," Edelstone said. "What's troubling today is the Qualcomm and NXP transaction in China, viewed as a very strategic transaction, has been approved by every regulatory body.in the world except China."
Tensions with China sparked anxiety across the semiconductor industry throughout last month, with the Semiconductor Industry Association (SIA) warning in a June statement that tariffs would damage the industry.
"While the U.S. semiconductor industry shares the Trump Administration's concerns about China's forced technology transfer and intellectual property (IP) practices, the proposed imposition of tariffs on semiconductors from China, most of which are actually researched, designed, and manufactured in the U.S., is counterproductive and fails to address the serious IP and industrial policy issues in China. We look forward to working with the Administration to explain why imposing tariffs on our products would be harmful to our competitiveness and does not address our challenges with China," the SIA wrote.
The semiconductor index SOX saw a broad sell-off in June as trade worries intensified but have since largely recovered, with the index closing at 1,372.25 on Tuesday. Late Tuesday the Trump administration proposed tariffs on an additional $200 billion in Chinese goods. Initial reviews of the latest tariff proposals suggest they will have a limited impact on tech companies.
Geopolitical drama may heighten caution in boardrooms, but it won't ultimately hamper dealmaking nor slow the industry's roll, said Edelstone.
"We're not seeing board members suggest that deals wouldn't happen because of regulatory risk," he said. "The secular trends should continue."
Jim Cramer and the AAP team hold positions in Facebook, Microsoft, Alphabet, Amazon, Apple and Nvidia for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.