Chips are one of the biggest investment themes this year.

IShares PHLX Semiconductor (SOXX), the exchange-traded fund, rose 35 per cent despite the shutdown caused by the outbreak. There has been a wave of mergers and acquisitions in the chip industry this year, driven in part by the rising share prices of acquirers, which is one of the reasons for the rise in iShares PHLX Semiconductor.

Barron Weekly interviewed C.J. Muse, a well-known chip industry analyst at investment bank Evercore ISI, about the future of the chip industry. After earning an MBA from Columbia University, Muse worked as an investment banker at Lehman Brothers, became an equity research analyst in 2000, and worked at Barclays and Evercore ISI. In the annual survey conducted by Institutional Investor, Muse is the number one analyst in the chip industry. The 50-year-old now lives in New York and enjoys playing tennis and taking care of his new dog in his spare time. The following are the details of the interview.

Barron Weekly: why does iShares PHLX Semiconductor keep rising?

C J Muse:We need to recognize an important factor: before 2020 and the outbreak, the chip industry saw a pullback from the second half of 2018 to the end of 2019. Revenue in the chip industry fell 40% during the global financial crisis and then returned to its peak in three to four quarters. In the current cycle, income is 20% below its previous peak. We think this meansThe impact of the epidemic on the fundamentals of the chip industry is not very great.. Revenue in the chip industry is likely to grow by 5% this year, a sizeable increase given the industry's high correlation with global GDP.

Barron Weekly: what do you think is the next growth prospect for the chip industry?

C J Muse:Our basic expectation is that revenue will grow by 5% this year, 10% next year, or more. At present, the market's general expectation for next year is lower than we expected. The long-term investment theme of cloud technology is a factor driving the accelerated growth of the chip industry next year and beyond. In addition, the 5G cycle is also a driver, in which smartphone sales will be higher. Given the long-term growth momentum of cloud technology and the fact that smartphone sales are expected to grow by more than 10% this year, I think smartphone sales are likely to grow by 10% to 15% in 2021 after entering the 5G cycle.

The third driver is that the auto industry and industry are recovering after seven consecutive quarters of undershipments. These three factors will drive the growth of the chip industry in 2021. Other drivers are also expected to support chip stocks to continue to outperform the market. 2019 Coronavirus disease exacerbates digitization in almost all industrial verticals.

Barron Weekly: will the second wave of the epidemic have a negative impact?

C J Muse:A second wave of outbreaks and / or another shutdown will have an adverse impact. But at the same time, more and more enterprises and individuals begin to use more digital services. Because the chip industry is very important, it will relatively outperform other industries.

Barron Weekly: trade issues are very important to the chip industry. What does Biden's presidency mean for Sino-US trade and the chip industry?

C J Muse:This election has had a great impact on some of the chip stocks I have studied. Qualcomm Inc (Qualcomm, QCOM)'s financial results and general election are undoubtedly part of the reason for the surge in iShares PHLX Semiconductor.Sino-US relations will return to normal slightly after Biden takes office. The market had feared that restrictions on the supply of Semiconductor Manufacturing International Corporation equipment would be extended to all such Chinese companies, but if Biden took office, the market would no longer have to worry about it.

If the US government launches the stimulus package, it will be good for GDP, which in turn is conducive to the growth of the chip industry. Finally, the chip bill, which provides funding for local chip companies, will be a big focus, which is determined by the Senate Appropriations Committee.

China wants to build its own chip industry, and the US government should also provide support to its own chip industry, which I hope will become one of the key tasks of the next administration.

Under the Biden administration, the biggest winners are equipment suppliers, such as Lam Research (LRCX), Applied Materials Inc (Applied Materials, AMAT) and KLA (KLAC). Texas Instruments Inc (Texas Instruments, TXN) is likely to come under pressure as the proposed increase in corporate tax favors overseas chipmakers such as NXP Semiconductors (NXPI).

Barron Weekly: what is the reason for the M & A boom in the chip industry this year?

C J Muse:First, there are not many high-quality assets left in the industry. Although the epidemic has brought uncertainty, the scarcity of high-quality assets is one of the reasons why some companies are looking for mergers and acquisitions. Second, China plans to build its own chip industry, and American chip companies will face competition in the next five to 15 years. Scale is the key to success. Third, the share prices of some chip companies have risen sharply over the past 12 months.

Analog Devices (ADI) proposed to acquire Maxim Integrated Products (MXIM) through an all-share transaction in July. The epidemic was still raging at the time, and such deals were rare. Then NVIDIA Corp (Nvidia, NVDA) agreed to buy ARM Holdings,Advanced Micro Devices (AMD) agreed to buy Xilinx (XLNX), Marvell Technology Group (MRVL) agreed to buy Inphi (IPHI), these transactions are carried out in the form of all-share transactions. It is a good thing for these companies to be able to complete these deals at a time when Chinese regulators are increasing their approval requirements for mergers and acquisitions.

Barron Weekly: Moore's Law used to drive the growth of the chip industry, but now the cost of technological progress is getting higher and higher.

C J Muse:What drives the continuous increase in the production capacity of cutting-edge technologies is high-performance computing (chips for cloud computing). The Azure of Alphabet Inc-CL C, Amazon.Com Inc (Amazon.com, AMZN) and Microsoft Corp (Microsoft, MSFT) are all fiercely competitive in cloud computing, and I don't think they care about cost, because the return on investment in this area is much higher than the return from the consumer market, which is a very important difference. While capital density in this area is getting higher and higher, returns will drive investment in cutting-edge technology.

Other technologies have also been used to circumvent the challenges posed by Moore's Law, such as advances in packaging technology, and design has also played an important role. As a leader in the field of graphics processing, NVIDIA Corp is using GPU for artificial intelligence machine learning. NVIDIA Corp is not yet at the forefront. The company usually lags behind in cutting-edge technology, but has the best products. So the most important thing is not just the transistor and the size of the transistor.

Barron Weekly: are there any other acquisition opportunities in the chip industry?

C J Muse:There are now five big equipment companies in the chip industry, and Applied Materials Inc's acquisition of Tokyo Electronics (Tokyo Electron) and Lam Research's acquisition of KLA have been rejected by US regulators, so there is nothing left to buy. The four main computing platforms in the chip industry are Qualcomm Inc, NVIDIA Corp, AMD and Intel Corp (Intel, INTC). The DRAM field has been integrated into three companies. In the NAND field, Intel Corp sold his NAND business to SK Hynix (SK Hynix, 000660. (South Korea) and then there are six companies competing.

In other areas of the industry, Texas Instruments Inc and Analog Devices are the two major manufacturers of analog chips. Further consolidation will occur among leading analog / hybrid chip manufacturers such as Marvell, NXP, Microchip Technology (MCHP), ON Semiconductor (ON), Power Integrations (POWI) and Monolithic Power Systems (MPWR).The most concerned growth areas of the chip industry are cloud, networking and automotiveMarvell is probably one of the most watched companies. A bigger concern is that if a major company in one area wants to move into another, who would be interested in mergers and acquisitions? Qualcomm Inc obviously doesn't have this intention, but the company's CEO is regarded as a value investor and I think he will be very concerned about the purchase price.

Barron Weekly: which chip stocks should investors buy?

C J Muse:NVIDIA CorpArtificial intelligence platforms are being developed and the company plays a leading role in providing training and artificial intelligence to leading cloud companies. NVIDIA Corp's vertical enterprise service platform is undervalued, and if this business is successful, I think the company's earnings per share will increase from $15 next year to $25 by 2025. My target price for NVIDIA Corp is currently $600. if profits increase, the stock price is expected to rise to $1000 over the next three years.

NXPRevenue related to the automobile industry, which accounts for 50% of total revenue, is one of the companies with the largest number of car-related businesses in the chip industry, and the company's revenue will grow at a compound annual rate of 12%. In addition, NXP is a leader in radar, electric vehicle battery management systems and automotive digital trunking. By next year, investors will begin to think that the company will earn $10 a share in 2022. My target price is $160. If the profit is in line with expectations, such a target price may seem conservative.

Barron Weekly: which other companies are you optimistic about?

C J Muse:Teradyne (TER)Some of the business is worth watching, and we expect the business cooperation between the company and Apple Inc (Apple, AAPL) to remain strong next year. Qualcomm Inc's business in the automotive industry will benefit Terida, the automotive industry will pick up sharply next year, and Terida's industrial robot business will have good growth. We expect Terrida's earnings per share to reach $5 next year and $7 by 2025, supporting the current target price of $110 and the future target price of $140.

The other isMicron Technology Inc (Micron Technology, MU). The outbreak has hit terminal demand, leading to the company's poor performance this year, but supply and demand are expected to return to balance. There is likely to be a supply shortage in 2021, which means Micron Technology Inc can raise the price of DRAM for several quarters, helping to boost share prices. Our current target price is $75, which means there is room for 50% increase. Our expectations for "multiple quarters" are not high, so we may also raise the price tag.

Barron Weekly: what about the chip equipment unit?

C J Muse:Headquartered in the NetherlandsASML Holding (ASML)Unaffected by the US ban, the company's EUV lithography technology has an absolute advantage. ASML's profits are expected to accelerate and we expect earnings per share to reach 20 to 24 euros by 2025. Our current target price is 375 euros, and if earnings per share can reach more than 20 euros, the share price is expected to rise to 500 euros.

Barron Weekly: thank you for the interview.