Semiconductors and Quantum Computing: Navigating Thematic Investing & Geopolitics - Part II
This is part II of III in a limited series on the intersection of geopolitics with thematic investing in sectors with geo-strategic significance.
Semiconductors
Nvidia’s latest earnings are just the latest example of strong demand for AI-interfacing semiconductors. The company reported a 265% rise in revenue and laid out very upbeat guidance. Its market cap is currently $1.97 trillion.
Business is A-Boomin
In one day, it added more than $276 billion in market value, and has surpassed Alphabet ($1.8 trillion), Amazon ($1.82 trillion). Nvidia’s biggest seller were their GPUs, and a report by UBS reported that “We expect the GPU and chip segment to be the best near-term beneficiary of strong AI spending”.
CEO Jensen Huang says generative AI has reached a tipping point. "Demand is surging worldwide across companies, industries and nations”.
Another bullish tailwind for companies like Nvidia comes from the fact that many of these special advanced chips have been experiencing a manufacturing shortage and that resulted in a delay of companies rolling out generative AI models. A report from Deloitte last year found that they expect the “imbalance to continue well into 2024”.
The same report also predicts that total AI chip sales in 2024 will be 11% of the predicted global chip market of US$576 billion.
According to Barrons, “For the GPU and chip segment specifically, the UBS analysts estimate a 60% compound annual growth rate between 2022 and 2027, driving annual revenue from $15.8 billion to $165 billion over the same period”.
And geopolitical tension globally functions - and will likely continue to do so - as both a tailwind and headwind. See my previous reports below on the geopolitics of semiconductors:
AI Craze Boosting Demand for Chips, But Geopolitical Risks Linger
The Geopolitics of AI: Large Language Models
US Extends Chip Controls on China, What Now?
The Promethean Trap: China’s New Industrial Policy
Quantum Computing
Nvidia is also looking to position itself to benefit from a potential investment boom in quantum computing. Australia's Pawsey Supercomputing Research Center is gearing up for groundbreaking discoveries in the realm of quantum computing.
They're deploying eight powerful Nvidia Grace Hopper Superchip nodes, supercharging their open-source CUDA Quantum platform and promising a tenfold increase in processing performance. This collaboration unlocks new horizons for researchers, empowering them to explore a vast spectrum of possibilities:
The enhanced platform opens doors to novel algorithms, harnessing the unique potential of quantum computers. Researchers can optimize the design of future quantum hardware, paving the way for even more powerful machines.
Quantum computing capabilities will accelerate machine learning algorithms, leading to breakthroughs in various fields. Studying chemical reactions and materials at the atomic level will gain unprecedented depth and clarity.
The ability to analyze astronomical data with greater detail and speed will unlock new insights into the universe. Radio telescopes and other imaging instruments will gain enhanced capabilities, leading to sharper and more detailed observations.
Faster and more accurate data analysis will propel biological research forward, unlocking new discoveries. Exploring new financial modeling techniques powered by quantum computing could revolutionize the financial landscape.
Quantum computing's remarkable efficiency stems from its utilization of quantum mechanics principles to significantly enhance computing capabilities, enabling the processing of vast data volumes.
To illustrate, envision solving a maze: while a conventional computer would methodically explore each path sequentially—a process that becomes increasingly time-consuming with complexity—a quantum computer employs qubits in a state of superposition to examine multiple paths concurrently.
Read more about Quantum computing here.
This capability of a qubit to exist in various states simultaneously allows for the exploration of several paths at once, offering quantum computers an exponential speed advantage in tasks such as search and optimization challenges.
Gaining Momentum…
A McKinsey report highlights that 68% of startup investments in quantum technology since 2001 have been made in the last two years, signaling a burgeoning industry optimism.
According to McKinsey's June 2022 Quantum Technology Monitor, funding and investment activity for quantum technology startups surpassed US$1.4 billion in 2021, more than double that of 2020.
The industry is also seeing continued growth in later-stage venture funding, a shift indicative of a maturing ecosystem and growing focus on practical applications,
In December, Google announced the achievement of "quantum supremacy," a milestone indicating their quantum computer, powered by the Sycamore processor, solved a problem beyond the practical capabilities of classical computing.
Specifically, the Sycamore processor executed a calculation in 200 seconds—a task that, according to the best known algorithms, would require the most advanced supercomputers thousands of years to complete.
The enthusiasm for quantum computing's applications could potentially spur a market euphoria reminiscent of the AI-driven gains observed in the first half of 2023. Consequently, technology-centric indices like the Nasdaq or tech-focused ETFs may experience disproportionate growth compared to broader indices, such as the S&P 500 and the industrially oriented Dow Jones.
The optimism for quantum technology is further fueled by its strategic significance in global geopolitics, particularly in the context of the US-China rivalry.
Significant investments, particularly by China, which has allocated $15.3 billion to domestic quantum computing development, underscore the strategic importance of this technology.
However, the United States, led by tech giants like Google, Microsoft, and IBM—with IBM's "Eagle" being the world's most advanced quantum computer—remains at the forefront of quantum computing innovation.
This competition is also functioning as a catalyst for both government-supported research, from a national security perspective, and private sector initiatives aimed at securing a competitive edge commercially.
The Threat to Encryption
Among the various potential applications of quantum computing, cybersecurity and cryptography stand out as areas of critical importance. Quantum computing poses a significant threat to current encryption methodologies, necessitating the development of quantum-resistant encryption technologies.
The Economist highlighted that the potential of quantum computing to compromise widespread internet encryption prompted President Joe Biden to sign legislation in December. This law mandates government research into IT solutions that are resistant to quantum decryption.
Similarly, China's substantial investments in quantum computing underscore the global race for supremacy in this field.
Obstacles Remain
However, the quantum computing sector also faces challenges, including a limited number of commercially viable use cases and the dampening effect of high interest rates on new company formation.
The prohibitive cost of quantum computers, necessitating specialized hardware and infrastructure to maintain qubits at near-absolute zero temperatures, adds to the complexity and expense of quantum computing.
Research by the Journal of Quantum Information Science estimates the average R&D cost for a small-scale quantum computer at $10 to $15 million. Furthermore, quantum computers are prone to errors due to decoherence and other factors, complicating error correction and limiting quantum speedup advantages.
The accelerating efforts by companies and nations to enhance security capabilities in response to quantum computing advancements highlight the strategic importance of this technology in the global technological landscape.
*Not financial advice. The author of this report has exposure to quantum computing-focused securities.