Who actually makes money in semiconductors
'Chip stocks' is not a sector. It contains some of the best businesses on earth and some of the worst, and they look similar from outside.
Tell the monopolies apart from the commodities.
How Who actually makes money in semiconductors works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The only five moats there are
If you cannot name which of these a company has, it probably does not have one. It is merely doing well, which is a different and far more temporary condition.
- 1
The designers: asset-light, high margin, moat made of software
Fabless companies design chips and pay someone else to make them. Their moat is design expertise and, crucially, the software ecosystem built around their hardware. That ecosystem is a switching cost, and it is far stickier than the silicon itself.
- 2
The foundries: enormous capital, enormous scale, near-monopoly at the leading edge
Making the most advanced chips requires tens of billions and process knowledge accumulated over decades. Very few can do it at all. That concentration is a genuine moat and also a genuine geopolitical risk.
- 3
The equipment makers: the real chokepoint
The machines that make advanced chips are made by a tiny number of firms, and the most advanced lithography by essentially one. Everyone must buy from them, whoever wins the chip war. That is the closest thing to a toll booth in modern industry.
Sell shovels. In semiconductors, the shovel-maker has the best moat in the entire chain.
- 4
And memory: a commodity wearing a lab coat
One maker's memory is interchangeable with another's. No brand, no switching cost, no network effect. Price is set by supply and demand, capacity takes years to build, and the cycle is violent. The P/E inverts: it looks cheapest at the top, right before profits collapse.
You can place any chip company you own into one of the four buckets, and say which moat it has.
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'Chip stocks' is not a sector. It contains some of the best businesses on earth and some of the worst, and they look similar from outside.
The near-monopolies and the commodities, side by side, because they look identical from outside and they are not.