Experienced investors know that the semiconductor industry has been the one of the highest returning industry over the past 5 years. But beyond that, our areas of expertise tend to differ. The semiconductor industry has been around since the 1960 and formed out of the push for faster processors. These processors are made by melting down sand (silicon) until it reaches a molten state, so that a silicon “seed” can be placed in the molten silicon. In certain situations silicon will conduct electricity and in other situations it will not. As a semiconductor, this on/off capability forms the ones and zeros of binary code. The heavy-hitters in this industry are: Intel, Samsung, SK Hynix, Qualcomm and Micron Technology, to name a few. Intel’s co-founder Gordon Moore observed that the number of transistors per square inch on integrated circuits had doubled every year since their invention. Moore's law (devised in 1965) predicted that this trend would continue into the future. Fifty-two years later this trend still holds true – but will come to an end in 10 years or (much) less. One of Intel’s most advanced processor is 32mn in distance between the discrete components on the chip. The atoms used in silicon chip fabrication are around 0.2nm thick. If the distance between discrete components continues to reduce by half every two years, in 10 years the components will be less than an atom apart – which is practically impossible. This establishes our hard limit: 10 years. To establish our “soft” limit, we need to take a look at the silicon’s properties and why it was used for processors originally. Silicon is used in processors because, as a semiconductor, its oxide layer stops electors from divulging from their path. However, at the nanoscale, quantum physics is in effect, rather than classic physics. With transistors that measure only 32 nanometers in width, it won't be long before the oxide layer becomes too thin to act as a gate for electrons. Transistors won’t go away at this point, but advancements in processor improvement will level off. It’s hard to pinpoint when engineers will agree that making the transistors smaller will actually be less effective. Though, if 3 atoms thick is the “breaking” point, Moore’s Law will no longer hold true in 5 years (our soft limit). With that said, scientists are still making breakthroughs in this field, and so the industries outlook might not look that bleak. IBM Research developed a new carbon based processor, which is said to open pathways to dramatically faster, smaller and more powerful computer chips beyond the capabilities of traditional semiconductors. Though investors should be weary as this hasn’t been rolled out yet, and engineers are reaching the physical limits of silicon.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.