Demand Profile Remains Robust for Digital Infrastructure Amid Russia-Ukraine War
The Semiconductor Industry Association (SIA) shared global semiconductor industry generated sales of $50.7 billion in January, up 26.8% year over year and little changed compared to December 2021, confirming the seasonal decline we typically see didn’t unfold this year. When semiconductor foundry company Taiwan Semiconductor (TSM) reported its December quarter results in mid-January, it shared “the multiyear megatrend of 5G and High-Performance Computer (HPC)-related applications will drive multi-unit volume growth and more importantly, spur substantial semiconductor content enrichment in HPC, smartphone, automotive and IoT applications.” Alongside those comments, Taiwan Semiconductor guided its current-quarter revenue to $16.6-$17.2 billion, up 5%-8.9% quarter over quarter. Since then, the company reported its January revenue rose 35.8% year over year or 10.8% compared to December and should release its February results in the coming days.
The strong start to 2022 for chip demand is also evidenced by the SIA reporting January 2022 results as the second-highest ever monthly total in January with year-over-year global sales increasing more than 20% for the 10th consecutive month. Rather impressive given the continued chip shortage that is plaguing the industry and hobbling demand in other markets from autos to appliances.
On a regional basis, SIA’s January report noted sizable year-over-year increases in chip sales to the Americas (40.2%), Europe (28.7%), China (24.4%), Asia Pacific/All Other (21%), and Japan (18.9%). That geographic breakdown is rather timely given the demand and supply chain disruptions associated with the Russian invasion of Ukraine. Per data collected and published by SIA, “While the impact of the new rules to Russia could be significant, Russia is not a significant direct consumer of semiconductors, accounting for less than 0.1% of global chip purchases, according to the World Semiconductor Trade Statistics (WSTS) organization. The broader Russian Information & Communications Technology (ICT) market totaled only about $50.3 billion out of the $4.47 trillion global market, amounting to 1.13%, according to 2021 IDC data. In addition, the semiconductor industry has a diverse set of suppliers of key materials and gases, so we do not believe there are immediate supply disruption risks related to Russia and Ukraine.”
That later comment speaks to concerns over essential gases following comments from market research firm TrendForce that about 70% of the world’s semiconductor-grade neon gas is supplied by Ukraine. Neon is a chemical is used in lasers for chipmaking, and Ukraine also supplies about 40% of the world’s krypton gas used in Krypton Fluoride (KrF) lasers also used in semiconductor manufacturing. Russia is the source of 35% of the palladium used in the U.S. and is used in sensors and memory semiconductors.
Given the US-China trade standoff as well as Russia’s annexation of Crimea in 2014, chip companies began diversifying their supplier base for these key gases. Intel (INTC), Global Foundries (GFS), and United Microelectronics Corp. share they do not anticipate any impact. SK Hynix shared it secured a lot of chip materials, and there is “no need to worry.” And while Taiwan Semiconductor has yet to comment, Taiwan's Ministry of Economic Affairs shared it checked Taiwan's semiconductor supply chain and found no direct impact on materials or production activities.
While those efforts should limit the impact, the supply chain reality is with chip demand and production running high, the lingering question is one of duration. The longer the duration of the Russia-Ukraine war, the more likely supply of those gases begins to impede chip production.
One of the more recent semiconductor companies and Digital Infrastructure constituents to report their quarterly results was Marvell Technology (MRVL), which did so several days into the war on March 3rd. Its revenue for the quarter that ended in January, rose 11% sequentially and 68% year over year with all end markets growing sequentially and year-over-year. On its earnings conference call, Marvell management called out cloud and enterprise networking delivered stronger than projected contributions and on a combined basis, cloud, 5G, and auto increased to 40% of total revenue for the quarter. Revenue for the fourth quarter was $241 million, growing 12% sequentially and 45% year-over-year. These results were driven by our 5G business, which delivered substantial revenue growth of over 30% sequentially.
For data center, the segment that accounted for 43% of Marvell’s revenue for the quarter, revenue was $574 million, up 15% sequentially and 113% year-over-year, exceeding management’s guidance due to robust demand from hyperscale customers. Marvell’s enterprise networking business benefitted as companies have realized hybrid work is “here to stay” leading companies to “refresh their infrastructure, enabling new digital capabilities, increasing bandwidth, building redundancy, and beefing up security.” For the current quarter, Marvell sees revenue of $1.425 billion, up from $1.34 billion in the prior quarter and we’d note that upbeat forecast follows similar ones from AMD (AMD), Nvidia (NVDA), Skyworks (SWKS), and other chip companies.
In our view, one of the key aspects of our Digital Infrastructure thesis that centers on the virtuous cycle of content creation and consumption driving network and connectivity growth is ringing true. While some industries that have their business reliant on oil, natural gas, wheat, and other commodities prevalent in Russia and Ukraine, the war is driving content consumption and creation in the short-term while key drivers for the theme and index – 5G, IoT, the connected car and eventually the metaverse will continue to drive network densification and the deployment of new technologies. To that point, Meta (FB) recently shared that its grand ambition of building the ultimate “metaverse” won’t be possible if there aren’t drastic improvements in today’s telecoms networks.
In response, AT&T (T) Executive Vice President David Christopher shared 5G is being deployed faster than 4G was and noted the “massive investment across operators.” During the 2022 Mobile World Congress, the GSM Associations (GSMA) shared 5G connections will surpass 1 billion in 2022 and 2 billion by 2025, and by the end of 2025, 5G will represent one in five of total mobile connections. Helping drive that shift, over the last year 5G services were launched in Latin America and Sub-Saharan Africa. And even though other territories have a head start, there is still much work to be done as evidenced by Verizon (VZ) recently announcing its 5G Ultra Wideband is now available to 100 million people in the U.S, in over 1,700 cities. Keep in mind the current U.S. population is ~330 million people across roughly 19,500 incorporated cities, towns, and villages. And while Christopher went on to say that those 5G networks will offer low latency, consistent speeds, and high capacity, we see Meta’s comments only reinforcing what we recently said about 6G.