SPECIA L REPORT

The 5G DeviceEvery American

Will Need
By Jeff Brown

A Brownstone Res ea rch Pub lica tion

Special Report
The 5G Device Every American Will Need
By Jeff Brown, Editor, The Near Future Report
Whenever you connect to the internet on your
computer, smartphone, or smart TV… a vast
physical infrastructure makes that connection
possible.
For instance, nearly 750,000 miles of fiber-optic
cable runs beneath the ocean to connect the
continents. It carries most of the world’s internet
traffic. These transoceanic cables connect to vast
land-based fiber-optic networks which, in turn,
connect to consumers’ homes and businesses.
Over the years, this massive network has
evolved. Companies and governments built new
infrastructure to support the next generation of
wireless connectivity.
We built out the 1G (first-generation) network
in the 1980s. Compared to what’s possible
today, it didn’t allow you to do much. You could
only make phone calls – there was no layer for
carrying other types of data. And you had to
use one of those brick-sized cell phones Gordon
Gekko yaps into in the movie Wall Street.
Then, in the 1990s, we got 2G. With it, you could
send and receive emails and text messages.
Next, in the early 2000s, 3G brought faster
connection speeds. The quality wasn’t always
the best. But for the first time, you could stream
video and audio.
The Near Future Report
Finally, we got the network we use today – 4G. It
went live at the start of the 2010s. But today’s 4G
network faces a problem.
It can be summed up in one word: data. Both
consumers and businesses have a seemingly
endless thirst for consuming and sending more
data over wireless networks.
The chart on the following page shows the
amount of data and voice traffic over the world’s
wireless networks since the first quarter of 2015.
And it shows the exponential growth in demand
for sending and receiving data (like images,
music, and websites) over wireless networks.
The amount of voice traffic (in gray) has been
roughly constant over the last several years.
But what’s striking is that data (in blue) has
exploded. In the first quarter of 2020, over 45
exabytes of data were transmitted per month.
Just one exabyte is equivalent to 100,000
times all the printed material in the Library of
Congress. All the words ever spoken by human
beings can be contained in five exabytes.
And over 45 exabytes of data (and growing) are
transmitted every month.
So what does this mean for internet users?
2
Have you had a dropped call Global Growth of Mobile Data Traffic
in the last 12 months? Or how 50 100
about when you dial a number
Mobile network data traffic grew 56%
and someone picks up, but you
between Q1 2019 and Q1 2020
can’t hear them? 40 80

Total Traffic (Exabytes per Month)

Year-on-Year Growth (Percent)

Have you noticed your
30 60
internet’s slower? Can’t seem
to send an email without a
problem? 20 Voice Data 40
Year-on-year growth

These issues are almost always

10 20
due to network congestion.
Just like when there’s a traffic
jam on a highway and the cars 0 0
aren’t moving… When too Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
’15 ’16 ’17 ’18 ’19 ’20
many people use a wireless
Source: Ericsson
network at once, the network
“bottlenecks” – and the digital
packets of information just have a “mobile-first” strategy that prioritizes
can’t get where they’re intended to go. access to products or services via mobile devices
like smartphones.
And it may surprise you to learn that this
problem is rather unique to the U.S. As more and more business is conducted online,
productivity is dependent on having reliable
America’s Sluggish Wireless Networks internet access.

As of July 2019, the U.S. 4G download speed America’s overloaded 4G networks could soon
came in at an average of 22 Mbps (megabits per pose a serious threat to the economy’s ability to
second). These mobile internet speeds are rather keep pace with the rest of the world.
slow compared to the rest of the world.
Fortunately, help is on the way…
(Megabits per second, or Mbps, is a common
measurement for internet connection and Enter 5G
download speeds. For example, to stream a
As I write this, we are in the midst of a brand-
high-definition video from Netflix, you need a
new communications infrastructure build-out.
download speed of at least 5 Mbps.)
New towers are going up. New fiber-optic lines
According to a May 2019 report, the U.S. comes
are being laid.
in 30th place, behind countries like Finland,
Qatar, and Albania… The purpose of this build-out? To upgrade
America’s failing communications infrastructure
Why is this such a big deal?
to the next generation of wireless connectivity:
At an economic level, it’s a significant the fifth generation, or 5G.
competitive disadvantage. Work and digital
With 5G, the peak speed jumps to 10 gigabits per
services are mobile these days. Many companies

The Near Future Report 3

second (Gbps). One gigabit is 1,000 megabits.
So at peak speed, 5G will be 450 times faster
than the average 4G connection we have now.
Even if we assume that average 5G speeds will be
just 10% of their potential, we’re still looking at
1,000 Mbps. That means that average 5G speeds
will be 45 times faster than what we have today.
And, of course, that’s assuming we currently get
the average 22 Mbps speeds. Many of us only
receive much slower speeds, which means the
change to 5G will be even more amazing. If we’re
currently getting only 10 Mbps, our wireless
speeds will be 100 to 1,000 times faster with 5G.
And with that kind of speed, you’ll be able to
download a two-hour movie in 10 seconds.
Dropped phone calls and slow-loading web pages
will be things of the past.
Plus, some previously “sci-fi” tech will finally
become a reality. Technologies like self-driving
cars, virtual reality, artificial intelligence, and
holographic projection will all operate over
high-speed 5G connections. The applications are
endless.
5G is a game changer because of all the
technological innovation it will bring about.
I also estimate that the 5G build-out will create
an additional three million jobs. That includes
jobs associated with building and maintaining
the wireless networks as well as jobs associated
with products and services that will be created
thanks to the high speeds of 5G. It will also add
about $500 billion in U.S. GDP growth.
And here’s the thing… While the infrastructure
build-out will take years to cover the entire
country, 5G services are already launching in a
number of cities.
Verizon has launched 5G wireless connections in
36 cities as of the time of writing, and more cities
The Near Future Report
are soon to follow. And that is just one of the U.S.
carriers…
As anyone who’s followed my research knows,
the 5G revolution is taking place over three
distinct phases.
These phases aren’t new. Whenever a core
wireless communications technology is being
introduced to the masses, it consistently follows
this formula. With 5G, it’s no different… except
for the fact that the money being poured into
5G infrastructure eclipses everything that came
before.
You see, the economic impact of 5G won’t just
be 20% or 50% greater. It will be in the range of
three to five times more significant than the 4G
wireless build-out…
And what’s important to understand is that there
is a fundamental, technical reason for why these
networks are more expensive to build.
The 5G network architecture has changed
compared to 4G. 3G and 4G technology used
wireless towers that could cover 30–45 miles
over flat terrain.
But 5G is completely different. It uses what’s
called “small cell architecture,” which requires
far more cell phone tower locations. For major
metropolitan areas, this could mean one small
cell phone tower on almost every street corner.
At the start of the build-out, we had about
200,000 cell phone towers scattered across the
U.S. Yet when the 5G network is constructed,
there will be more than 1,000,000 cell phone
towers to support the higher bandwidth, higher
speeds, and new services delivered over 5G.
That’s at least a five-times increase in the
number of towers needed for 5G compared to the
previous generation.
So that should help you understand exactly how
4
much investment has already gone into 5G… and
give you a good idea of what’s to come.
Here are all three phases:
• Phase One: Physical network build-
out – infrastructure (towers, fiber-optic
networks) and equipment (antennas, base
stations, routers, and switches)
• Phase Two: Wireless devices
(smartphones, tablets, home routers, etc.)
that run on the new 5G network and the
components that go inside them
• Phase Three: Services – companies that
deploy services that take advantage of the
5G network
We’re now well into Phase One of the build-out.
This period of physical infrastructure build-
outs is highly beneficial to “picks and shovels”
type companies – the ones that provide the
towers, fiber-optic cables, and communications
equipment enabling 5G networks.
And Phase Two kicked off in 2019 when the
first 5G devices went up for sale. As time goes
on, we’re going to see a major expansion of the
number of those devices sold.
This is where the 5G experience starts to hit the
mainstream. Mobile devices that we all use every
day, like smartphones and tablets, will soon be
5G-capable. And once that happens… and the
masses understand just how game-changing 5G
wireless speeds are… millions of now-obsolete de-
vices will need to be upgraded to take advantage.
This report covers two investment opportunities
that are uniquely positioned to do well in this
environment. Let’s get started…
Company No. 1: The Supplier of
Smartphone Giants
Like I just mentioned, the smartphone in your
The Near Future Report
pocket will soon be obsolete. Every single mobile
phone, all 3.5 billion of them, will have to be
replaced.
So today, I’ll show you the one company that will
profit as consumers rush to trade in their phones.
(Hint: It’s not one of the big smartphone brands
like Apple or Samsung.)
But first, just a bit of background…
5G wireless technology is the most significant
development in wireless technology since
the first generation in the 1980s. 5G
wireless technology is not evolutionary; it is
revolutionary.
5G wireless networks will operate over different
radio frequency (RF) spectrum. Because of this,
3G and 4G phones – the phones you and I use
every day – simply will not work on 5G networks.
That means that every single smartphone in the
world will have to be replaced in order to access
5G wireless services. This will be the largest
consumer electronics replacement cycle in
history.
And the market is perfectly primed for it.
Massive Upgrade
Smartphone models over the last three years
have been largely the same. Except for the
addition of 3D-sensing technology, each
successive smartphone generation has only been
moderately better than the previous generation.
A bit more memory, a faster processor, better
quality resolution in the camera, but nothing
revolutionary. Nothing to cause consumers to
rush out and upgrade their phones.
And it shows in the numbers.
Back in 2007 when the very first iPhone was
released, consumers replaced their mobile
5
phones, on average, about once
every 19 months. From 2007
through 2014, this replacement
cycle remained under two
years.

In 2019, this cycle rose to over

33 months.

To my earlier point, there just

hasn’t been enough reason for
consumers to upgrade their
phones. The new phones just
don’t do much more than the
old phones. We have been
waiting for something big…
and that something is 5G.

In 2018, around 2.9 billion

people owned smartphones
worldwide. By 2021, that
number is estimated to
increase to 3.8 billion.

Every single one of those

phones will have to be
replaced. None of them will
work on 5G networks.

A Highly Leveraged Play

on the Wireless Industry
This is precisely what brings
us to Skyworks Solutions
(SWKS).
No other semiconductor company is more
singularly tied to the mobile phone industry
than Skyworks. This has been one of its greatest
strengths and one of its greatest weaknesses.
When the mobile phone industry is booming,
Skyworks is doing great. When the industry
growth slows, so does Skyworks.
In Skyworks’ Q1 2020 earnings call, it reported
that 73% of its revenues came from the mobile
industry, and only 27% came from non-mobile
markets – what Skyworks calls “broad market.”
And the company has been intentionally working
towards expanding its business outside of
wireless and mobile devices to help smooth
out its revenues when the mobile industry is
cyclically slow.
Skyworks specializes in providing
semiconductors for many of the key functions
of mobile devices. It is most well-known for its
radiofrequency (RF)-related semiconductors,
which require deep technical expertise to design.

The Near Future Report 6

Skyworks has almost exclusively focused on RF The Difference in Complexity Between
applications since it was formed in 2002 as a 4G and 5G in a Smartphone
result of a merger of two different companies. 4G 5G Complexity

We can think of its key products as RF Filters 40 70 1.75 times more

semiconductors that help connect a mobile RF Bands 15 30 2 times more
device to a wireless network. Some examples are
Transmit/
a semiconductor that allows a device to connect Receive Filters
30 75 2.5 times more
to a Wi-Fi network, antenna tuners, Global
Switches 10 30 3 times more
Positioning System (GPS) semiconductors that
enable location and mapping, and band filters – Frequency
10 200 20 times more
essentially semiconductors that enable a phone Combinations

to filter out noise and receive/transmit signals in 4 inputs, 4

2 inputs, 2
a specific band of RF spectrum. Multiple Inputs
outputs for
outputs for More than 2
Multiple Outputs download times complex
download
and upload
Example of Skyworks Semiconductors
Inside of a Smartphone
From a smartphone perspective, there is a
significant difference between 4G and 5G
technology. Because 5G smartphones will be able
to download video and data around 45 times
faster than 4G with almost zero delay, naturally
there will be more sophisticated technology in a
5G smartphone.

In the chart above, we can see that there are

It’s not critical that we understand the technical
details of every semiconductor that Skyworks
designs and sells to mobile phone manufacturers.
Here’s the important part: When your next
smartphone can connect to a 5G network,
you’ll have Skyworks, in part, to thank for
it.
It’s also important to understand how the
migration from 4G to 5G wireless technology
creates an even larger opportunity for Skyworks.
In order to do that, we need to understand the
difference in complexity between a 4G and 5G
smartphone.
twice as many RF spectrum bands, 2.5 times
more transmit and receive filters, and 20 times
more frequency combinations that 5G smart-
phones need to be able to use to download and
upload information.
5G-enabled smartphones will be able to receive
data and information through four separate an-
tennas and do the same when sending informa-
tion back through the wireless network.
Again, we don’t need to deeply understand these
technical differences between the two technolo-
gies. What’s important is that we see the magni-
tude of these improvements.
And from an investment perspective, here’s why
that matters: Additional complexity in 5G
technology translates into higher sales per
smartphone for a company like Skyworks.

The Near Future Report 7

 Skyworks’
Market Position
Couldn’t Be Better

As we might expect, this will be

transformative for Skyworks’
future business.

Skyworks’ own estimation

is that the dollar value of
semiconductors, on average,
it can sell in a smartphone
will jump from $18 in an
average 4G phone to $25 in
an average 5G phone. That’s
a 39% increase in business
opportunity per phone. I was up at Yale University in 2019 – attending a
class for some postgraduate studies I completed
We should remember that every single one
at the School of Management – and I got into
of those 3.5 billion smartphones will need to
an argument with a professor who was trying to
be replaced. That’s a $87.5 billion business
convince the class that Apple was a monopoly.
opportunity for Skyworks. That’s a big number
I politely corrected him. He dug his heels in the
compared to Skyworks’ fiscal year 2019 revenue
ground, saying that Apple’s products were “sticky.”
of $3.37 billion.
It was there that I had to draw the line and
I really like to see best-in-class technology
firmly explain that Apple’s market share in
companies with massive market opportunities in
smartphones around the world is a small
front of them. Skyworks is going to experience
minority. It has, in fact, 12–13% market share on
some golden years during the next three to four
average. That ended the argument.
years as this global smartphone replacement
cycle takes place. While there are large players like Samsung, Apple,
and Huawei, none of them have anywhere near a
And no other major semiconductor company is
majority market share. It’s a highly fragmented
better positioned to do so. Skyworks’ largest cus-
market. A company like Apple, with such a strong
tomers are the who’s who of smartphone man-
brand and retail market presence, may “feel”
ufacturers… companies like Hon Hai Precision
like it dominates, but that feeling means nothing
Industry, Samsung, Huawei, and Xiaomi.
when we objectively look at the numbers.
Some of us may not recognize the name “Hon
And the numbers tell us a great story about Sky-
Hai Precision Industry.” Hon Hai is also known
works. Its largest three customers, Apple (through
as “Foxconn,” and it is the world’s largest
Foxconn), Samsung, and Huawei are the top three
contract electronics manufacturer. Foxconn is
smartphone manufacturers in the world, com-
headquartered in Taiwan and manufactures
manding a combined 50% global market share
game consoles for Nintendo and Microsoft,
and over 60% of Skyworks’ annual revenues. On
Blackberry phones, Xiaomi smartphones, and
top of that, Xiaomi, Oppo, Vivo, and Motorola are
you guessed it… Apple iPhones.
all key customers of Skyworks as well.

The Near Future Report 8

Now we can clearly understand why Skyworks
is so leveraged to the health of the global
smartphone industry.
With consumers now waiting an average of
33 months to upgrade their smartphones, the
market just isn’t growing fast enough to offset
this long replacement cycle.
And the reality is, as the replacement cycle kicks
in for new 5G-enabled smartphones, Skyworks
will be one of the hottest large-capitalization
technology stocks in the market.
Let’s make sure we get investment exposure to
this market leader in wireless semiconductors
that will benefit from the replacement of every
smartphone on earth…
Action to Take: Buy Skyworks
Solutions (SWKS) up to $120 a share.
For our latest risk managment, please see
our portfolio page.
If this stock is trading above its recom-
mended buy-up-to price when this research
is published, we recommend readers wait
for it to fall back within buy range.
Before we get to the next company poised to soar
in value as Phase 2 of the 5G revolution takes
hold, I want to introduce you to one of the key
trends that 5G technology will enable: artificial
intelligence (AI).
You may not think it, but AI already plays a
massive role in your everyday life. And once 5G
networks reach the masses, that presence will
only get bigger and bigger. I’ll show you exactly
how in the coming pages.
The next company we’re discussing in this report
is positioned to take advantage of both of these
massive trends at once. Let’s dig in…
The Near Future Report
Company No. 2: The Most Important
Foundry of the New Industrial
Revolution
During the Industrial Revolution, steam power
and mechanization automated many of our
repetitive, physical tasks.
That led to a dramatic shift in the workplace.
Machines took over many of the grueling jobs
humans weren’t well-suited for. But rather than
the doom and gloom of mass unemployment
many expected, the opposite happened. There
was an explosion of productivity and economic
growth that ultimately created far more jobs and
opportunities than were lost.
Today, we face a similar situation…
Just as innovations during the Industrial Revo-
lution automated menial physical tasks, AI will
automate many of our simple mental tasks.
This will cause another big shift in the work-
place. It will lead to another leap in productivity,
improved quality of life, and entirely new jobs
that don’t exist today.
That’s how powerful AI is. And it’s precisely
why countries like the United States and China
are determined to be the leader in this revolu-
tionary technology.
We’ve already positioned ourselves to profit from
this trend with several of our portfolio companies.
Today, I’m going to show you one more opportu-
nity to reap the benefits of AI development…
AI Workhorse
Regular readers will know that one of our
favorite ways to profit from AI development
is by investing in the “best of breed” GPU
semiconductor companies.
While graphics processing units (GPUs) were
originally designed to process graphics and
9
video, they have found widespread adoption
for AI and machine learning (ML) applications.
High-performance GPUs have been the
workhorses for the AI/ML industry, specifically
in the large, centralized data centers that run
complex AI algorithms.
Our Near Future Report holding NVIDIA
(NVDA) is one of the top semiconductor
companies providing these GPUs. And AI giants
Google and Facebook (another Near Future
Report holding) extensively use its products.
(NVIDIA was also the best-performing S&P 500
stock of 2016. And I expect it to continue to climb.)
One of the latest innovations in the AI hardware
space is something called an intelligence
processing unit (IPU). This is different from
the GPUs that NVIDIA provides. IPUs are
semiconductors that are built specifically for
artificial intelligence.
And early performance results have already
demonstrated that IPUs operate at performance
levels more than 100 times existing AI accelerators
(chips used to accelerate AI processing).
It’s important to clarify that GPUs and IPUs
are not an either/or proposition. GPUs will
continue to provide large-scale processing for AI
and ML… and at an accelerating rate. This will
be supplemented by more application-specific
semiconductors like IPUs.
The key thing to understand is that AI and ML
technology has advanced to the stage where
it needs specialized semiconductors to run
properly. This need has become urgent, and new
companies are popping up to do just this.
However, these leading-edge companies don’t
specialize in manufacturing. They specialize in
the design of these AI semiconductors. And they
all have one thing in common: They need to
outsource their production.
The Near Future Report
And I know exactly which company they will use…
The World’s Best
Semiconductor Factory
That company is Taiwan Semiconductor
Manufacturing Corporation (TSM)…
otherwise known as TSMC.
TSMC trades on the New York Stock
Exchange (NYSE) as an American
depositary receipt (ADR) under the ticker
TSM. It trades just like any other stock; the
ADR just allows investors with access to the
U.S. equity markets to easily buy TSMC,
which also trades on the Taiwan Stock
Exchange (TWSE).
TSMC is the largest semiconductor foundry in
the world. It plays a critical role throughout the
semiconductor industry… and the global
smartphone industry (which I discuss below).
A foundry is simply a company that
manufactures semiconductors on behalf of other
companies – basically, a contract manufacturer.
Prior to the 1980s, semiconductor companies
were vertically integrated. Everything was
done in-house. For example, Intel still designs,
manufactures, packages, and distributes its own
semiconductors.
It was a typical model in the earlier days of the
semiconductor industry. Companies hadn’t yet
moved to contract services, which would eventu-
ally serve all of the different stages in semicon-
ductor design, manufacturing, and packaging.
In the late ’80s, the concept of a “fabless” semi-
conductor company began to gain popularity.
Fabless simply means a semiconductor company
without a semiconductor fabrication plant – no
manufacturing facilities.
10
It was a natural direction for the industry due to
the increasing costs of building these fabrication
plants (“fabs”). Only semiconductor companies
with massive scale could afford to build their
own fabs – it is a multiyear and multibillion-dol-
lar endeavor.
For perspective, TSMC’s Fab 15 plant, which
broke ground in July 2010, cost over $300 bil-
lion New Taiwan dollars (NT$) – around US$9.4
billion. And every generation of manufacturing
technology comes with even higher costs.
In January 2018, TSMC broke ground on its
Fab 18 plant, which will begin manufacturing
advanced semiconductors using a 5 nanome-
ter (nm) manufacturing process this year. The
price… NT$500 billion (around US$17 billion).
And TSMC hasn’t stopped there. In late 2019,
TSMC announced that it had acquired land
where it plans to build a 3 nm plant for an esti-
mated NT$600 billion (US$19.6 billion), with
a completion date in 2023. And in May 2020,
TSMC announced plans to build another $12 bil-
lion semiconductor plant right here in the U.S.
While these costs may seem daunting – even in-
conceivable – for a profitable business… I assure
you, it’s quite the opposite.
In fact, these high costs of entry are TSMC’s
competitive moat. And for reasons I’ll soon show
you… no one can keep up with TSMC right now.
TSMC’s entire business model is built on scale.
Aside from being the very best at what it does, its
scale is what empowers TSMC to continue to in-
vest at such extraordinary levels.
TSMC generated $35.7 billion in revenue in
2019. How is that possible for a company that
doesn’t design or sell its own products?
Simple… TSMC manufacturers the semiconduc-
tors for companies like Qualcomm, NVIDIA, AMD,
Broadcom – even Apple – among many others.
The Near Future Report
All of these companies want to focus on what
they’re best at… designing some of the best semi-
conductors in the world. None of these compa-
nies know how to manufacture semiconductors,
nor is it in their interest to do so.
The Venture Capital Shift
Back to Semis
Investing in early-stage, application
specific semiconductor companies had long
fallen out of favor in the venture capital
community. The heavy cost of both design
and prototype manufacturing became less
attractive from an investment perspective.
Pure software companies have long been
more attractive investments. They are able
to iterate and scale much more quickly.
Instagram, a software-only social media
company, went from its founding in 2010,
to a sale to Facebook in August of 2012 for
$1 billion. At the time of the acquisition,
there were only 13 employees… who are all
very wealthy as a result. It is easy to see why
venture capitalists were drawn to software
businesses.
Compare that with the cost to develop a
complex system-on-a-chip (SOC), which
can run as high as $300 million-$1
billion. Less complex application-specific
semiconductors can range between $20-
$50 million. But advanced hardware and
software design tools have brought costs
down as low as the $3-$10 million range.
These dropping costs, coupled with an
industry need to have application-specific
semiconductors to run AI/ML software, has
resulted in a flood of investment into AI/
ML-focused semiconductor companies.
Apple, for example, outsources its own
semiconductor manufacturing to TSMC. But
not only that, it completely outsources its
11
smartphone manufacturing to another great
Taiwanese company: Hon Hai Precision Industry
– otherwise known as Foxconn.
This brings us back to artificial intelligence and
machine learning…
Following the Smart Money
Something incredible has been happening…
Aside from specific examples of how quickly
AI software is advancing, like DeepMind’s
AlphaGo easily beating the world champion at
the complex Go board game, there has been a
resurgence in AI/ML-related investment into
hardware – specifically, semiconductors.
Our research indicates that since 2014, almost
$7 billion of venture capital investment has
flowed into private, early-stage semiconductor
companies focused on AI and/or ML. $7 billion
across 46 companies.
This isn’t a fad. It’s the kind of turning
point I look for when identifying wide-scale
technological developments.
And guess what? Every single one of these
companies needs a manufacturing partner to
produce its semiconductors…
And that partner is TSMC.
One of the Fastest-Growing
Markets I’ve Ever Seen
Even more impressive than the investments
being made in AI/ML semiconductor companies
is how quickly the market for AI semiconductors
is growing. Just $1.6 billion in 2017, current
forecasts are for $66 billion by 2025. This is 40x
from where we were in 2017, implying torrid
growth over the next several years.
To be clear, this is a near-future event. AI-related
semiconductor manufacturing became very
The Near Future Report
material for TSMC in 2019.
And in 2020, AI/ML-related manufacturing
will likely account for 20-25% of TSMC’s total
revenues. With 2020 sales estimated at more
than $42 billion, that would put AI/ML-related
revenues in the $8.5–10.7 billion range.
While COVID-19 may shift some of those
estimates temporarily, it’s important to
remember this... Artificial intelligence is all
around us. It’s so pervasive, most of us don’t
even realize that we’re using it.
Anyone who’s used a search engine like Google,
spoken to an Amazon Echo, telephoned a
call center, or driven a Tesla has used AI and
likely not even known it. AI is being used for
self-driving cars, image recognition, speech
recognition, facial recognition, high-frequency
trading (used by hedge funds), network
optimization, cybersecurity, and on and on.
I understand that it might be difficult for
us to grasp the significance of how widely
artificial intelligence is used today. After all, it’s
software. We can’t see or touch it. And when AI
is implemented properly, it is invisible to the
consumers and enterprises that use it.
That’s why the numbers are so important. They
allow us to understand how significant this trend
is.
At least 46 fabless semiconductor manufacturers
are designing AI/ML semiconductors, selling
them, and having them manufactured by the
likes of TSMC. In 2020, TSMC will manufacture
somewhere between $8.5–10.7 billion worth.
And just as important, we’re about to see 5G
wireless semiconductors go into production in
large volumes.
These tailwinds of exploding growth in both 5G
and AI/ML semiconductors are enough to get me
excited about the timing of investing in TSMC.
12
However, there are three more
market dynamics that are
playing to TSMC’s favor…

More Than Meets the Eye

First, Intel has had a series

of missteps that caused
the company to be stuck
on its 14 nanometer (nm)
manufacturing process for
several years. As we can see
in the image at right, Intel has
been manufacturing with its 14
nm process since 2014. It only
just began its shaky transition
to 10 nm in 2019, and its
10 nm desktop CPUs aren’t
expected until the second
for a semiconductor manufacturer. Quantifying it
half of 2021. In comparison, TSMC began high-
makes it very easy to understand… TSMC’s 7 nm
volume production of its 7 nm process in April
process, for example, enabled a 60% reduction
2018. It also entered risk production of its 5 nm
in power requirements, a 30% performance
technology in March 2019 and just reached 5 nm
improvement, and at a 70% smaller size
volume production in 2020.
compared to its previous manufacturing process.
Even worse for Intel, in its Q2 2020 earnings,
TSMC is moving quickly on the 7 nm process.
Intel announced its 7 nm chip rollout would also
Since it began production in April 2018, its 7
be delayed until 2022 or 2023. (For perspective
nm production has increased to 35% of its total
on how far behind Intel is on its own targets, its
semiconductor production as of Q4 2019.
10 nm process was supposed to be in production
in the second half of 2016. Ouch.) In a world where AI/ML technology is running at
the edge of a network in mobile devices, sensors,
What Is Moore’s Law? and cars… power usage, performance, and size
mean everything. And Intel likely won’t release its 7
Moore’s Law dictates that the number of nm until 2022 or 2023... if it doesn’t delay it again.
transistors on a computer chip roughly
doubles every two years, while the cost TSMC likely has at least a three-year lead on
halves. This has been the natural trajectory Intel, which is an almost unheard-of advantage
of semiconductor innovation for the last in the semiconductor industry.
few decades. And as the chart above shows,
The troubles at Intel have caused a second
Intel hasn’t kept up…
advantage for TSMC – Apple announced in 2018
it’s moving away from Intel processors for its
The importance of keeping up with the migration iPhones. Intel just couldn’t keep up, so Apple is
from one process to another cannot be overstated moving on.

The Near Future Report 13

In place of Intel’s chips will be
its own “A14” chips… produced
by none other than TSMC.

And if all of this weren’t

enough, TSMC’s distant com-
petitor, GlobalFoundries, de-
cided to stop all 7 nm develop-
ment in August 2018. Global-
Foundries just didn’t have the
capital to keep up with the lead-
ing-edge process technology.

This resulted in AMD moving

all its 7 nm production from
GlobalFoundries to TSMC. And
it turned out to be a fantastic
move for both. 50% for a manufacturing business, it will
continue to rapidly expand its free cash flow
These competitive dynamics and the industry- generation. This will enable it to keep investing
wide momentum towards TSMC have given it a in the next leading-edge technology.
flood of capital to continue to invest in leading-
edge semiconductor manufacturing technology. I recommend building a position well before
So much so that – as mentioned earlier – TSMC the rest of the market catches on. TSMC will not
is already working on its next manufacturing remain at these levels for much longer.
process for 5 nm. (And it’s even rumored that
TSMC plans to begin risk production of its 3 nm
Action to Take: Buy TSMC (TSM) up
process as soon as 2021.)
to $57. For our latest risk management,
TSMC began early production of 5 nm please see our portfolio page.
semiconductors in 2019, with volume production
If this stock is trading above its recom­
beginning in April 2020. In fact, Apple’s A14
mended buy-up-to price when this research
chip, scheduled for 2020, is likely to be a TSMC
is published, we recommend readers wait
5 nm chip. This is meaningful because TSMC’s 5
for it to fall back within buy range.
nm technology will deliver another 20% power
reduction and 15% performance improvement at
a size that is another 45% smaller than the 7 nm There are more ways to profit from 5G. I’ve
chips. Amazing… I can’t wait for the A14 chip in prepared another research report on the future of
iPhones. 5G. I call it Phase Three: The Future of 5G Profits.
Access it immediately by clicking right here.
What does all of this mean for TSMC? I’m
confident that we’re in for a few fantastic years Regards,
for this blue-chip semiconductor company.
Jeff Brown
Its competitive moat is one of the largest I’ve Editor, The Near Future Report
ever seen. And with gross margins approaching

The Near Future Report 14

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The Near Future Report 15