Hedge Funds Pay $1 million+ for this

A friend of mine who works for a $15 billion hedge fund, her firm spent over a million dollars on a McKinsey report about the semiconductor industry. Now, she tried to read it, but this wasn't her area of expertise, so she came to me. Because she was like, look, I really like the videos you and Jen are putting out on the finance of AI. Would you try to break down the major players in the semiconductor space for me? And so I did. Here's exactly what I shared with her in under three minutes. There's three things we need to set the stage. We are within the AI ecosystem. We're in layer two, the chips. Second is when people talk about chips, they distinguish between memory and logic chips. Where the poster child for logic chips is NVIDIA. But NVIDIA is only one chip maker. And the reality is they don't make chips anymore than Apple makes the iPhone. They outsource the manufacturing. So to orient ourselves with the chip production process, we're gonna use the semi ETF SMH. SMH includes ~25 of the largest US-listed companies involved in semiconductor production, design, and equipment. Four companies listed are AI logic chip makers: NVIDIA, AMD, and Broadcom. But backing up a second, what actually happens when an infrastructure player building a data center places a chip order with NVIDIA, AMD or Broadcom? The first thing is the chip maker will have to use some kind of special software to create a chip design. The two major companies that sell the software like CAD are Cadence and Synopsys. Think of the software like CAD. NVIDIA or whoever creates the design, and that is sent to the fabrication facility or fab. TSMC, which stands for Taiwan Semiconductor Manufacturing Company, produces 90% of the cutting edge logic chips. This is why Taiwan has become so important to you politically. So what actually happens inside these fabs? And more importantly, which companies are involved? It starts with polished silicon wafers. Two suppliers, Shin-Etsu and Sumco, make up about half the world's supply. Both are listed in Tokyo, which is why you won't find them in SMH. The next step is really two in one. First is deposition where a thin film gets laid down on the wafer. That film is the actual material the circuit is built from. Then a second coating goes on top, a light sensitive chemical called photo resist, which acts as a stencil for what comes next. The deposition machines come from Applied Materials and Lam Research. The photo resist machine comes from Tokyo Electron. And the photo resist itself from Shin-Etsu, who you've seen before, JSR, a company taken private by Japanese state-backed fund in 2024. On the wafer, the photo resist goes into a machine where light bounces off and prints the circuit pattern into the coating. The light marks up which parts of the resist survive and therefore where the circuit ends up. This is called lithography. Only one company makes the machine for leading edge chips: ASML, based in the Netherlands. China however, just built one tier down. Now the whole process repeats as the wafer goes through the same sets of machines around 80 times. The deposited film accumulates into pattern layers, building transistors at the bottom and the wiring at the top. Once every layer is done, the wafer gets cut into individual chips by a Japanese company called Disco, which is where we get our GPU. It then gets mounted side by side with the memory, specifically HBM, which we covered in a prior video. But as a reminder, Micron and SK Hynix are two of the major players in HBM. The whole thing then sits on an ABF a film made by Ajinomoto, a Japanese company best known for inventing MSG. The last step is testing, though really it's been happening all along. KLA makes the inspection tools that check every layer as it's built and the final electric test comes down to Aventest and Teradyne. The reality is, NVIDIA doesn't sell chips, they sell racks. TSMC ships the finished chip to a Taiwanese manufacturer like Foxconn or Wistron. They mount the chips onto NVIDIA's board and build out into a compute tray. They add switch trays, liquid cooling and the whole thing becomes a rack that runs $6 million. That's what ships to...