Computers are getting smaller and more powerful, down to a phenomenon known as ‘Moore’s Law’, where processors double in power every two years. Here is one ‘picks and shovels’ way to cash in on the processor growth story.
You don’t need to be Bill Gates to know that computers are getting smaller and more powerful. It’s all down to a phenomenon known as ‘Moore’s Law’.
Intel co-founder Gordon Moore noted in 1965 that the number of transistors that can be fitted on a circuit board doubles every two years. Transistors are a rough measure of processing power, so Moore’s Law means anything with a processor is becoming twice as fast every two years. By extension, as a given task requires ever-fewer transistors, the cost of computing performance falls.
The law has held up since circuit boards were invented in 1958, and there’s a broad consensus that the trend will continue until at least 2019. But how can you profit?
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A ‘picks and shovels’ approach to the processor growth story is to invest in the lithography machines critical to building computer chips, says Dr Mike Tubbs in his Research Investments newsletter. These machines enable chip makers to cram ever-more components onto a single chip. There are three main players to choose from; Canon, Nikon and ASML (AMS: ASML). Until now, conventional lithography machines have used laser beams to cut circuit patterns onto a chip.
But laser technology has reached a physical limit in terms of beam thinness. Now extreme ultraviolet light (EUV) is being used to etch more intricate patterns onto chips. Canon is yet to announce any success with the method and Nikon won’t be able to sell EUV lithograph machines until 2014. That gives Dutch firm ASML, which plans to sell its first batch in 2012, a very good chance to increase its 65% market share.
ASML attained this position by maintaining research spending during the financial crisis, even though a “spending freeze” by its customers meant it suffered its first quarterly losses in six years. It returned to profits in the third quarter of 2009 and its first-quarter results for 2010 put it on track to beat its yearly sales record. At €23.15 the stock has recovered from the lows of 2008/2009, but still trades below its 2007 peak. On a 2010 p/e of 13, it looks cheaper than Canon on 18, or Nikon on 19. Tubbs has a buy limit of €29.
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