Semiconductors
The technology behind the devices and infrastructure we use every day.
Business Characteristics
- Technology & Engineering
- High R&D Requirements
- Global Supply Chains
- Cyclical Demand
- Capital Intensive for Manufacturers
Semiconductors are an industry, not one single business model. A company that designs chips without manufacturing them operates differently from a company that manufactures chips for other businesses.
What Is It?
The industry behind modern electronics
Semiconductors are materials used to make integrated circuits, commonly called chips. These chips process information, store data, control electrical systems, and connect devices. They are essential components in products ranging from smartphones and computers to cars, industrial equipment, and AI data centers.
Semiconductor businesses create value by designing chips, manufacturing them, licensing chip technology, or providing related products and services. Some companies focus on one part of this process, while others operate across several stages.
The distinction matters because different business models have different costs, capital requirements, risks, and financial metrics. A chip designer may depend heavily on external manufacturers, while a foundry must invest heavily in factories and manufacturing equipment.
Business Model in One Minute
From an idea to a chip used in a product
Research & Design
Engineers develop chip architectures, circuit designs, and intellectual property to solve specific computing or electronic problems.
Manufacturing
A chip manufacturer fabricates circuits on silicon wafers using complex processes and specialized equipment. Depending on the business model, this stage may be performed internally or by a third-party foundry.
Testing & Packaging
Chips are tested and prepared for integration into electronic products. Packaging protects the chip and provides the electrical connections needed for it to operate.
Sales & Integration
Chip suppliers sell products or provide technology to customers such as device manufacturers, cloud providers, automotive companies, and electronics businesses.
How It Works
Four common business models
Companies can participate in different parts of the semiconductor value chain. These categories are useful starting points, although real companies may combine activities or operate across multiple product categories.
- 1Examples: NVIDIA and AMD
Fabless — Design Without Owning Major Fabrication Plants
Fabless companies design and sell chips but outsource much of their wafer manufacturing to foundries. They still need engineering teams, research and development, product validation, and supply-chain management.
- 2Example: TSMC
Foundry — Manufacturing Chips for Customers
Foundries manufacture chips designed by other companies. Their economics depend on manufacturing technology, customer demand, factory utilization, production yields, and the ability to manage large capital investments.
- 3A distinct model with company-specific variations
Integrated Device Manufacturer — A More Integrated Model
An integrated device manufacturer, or IDM, combines chip design and manufacturing to varying degrees. The balance between internal production and external manufacturing differs by company and product.
- 4Specialized business models
Other Semiconductor Businesses
Some companies specialize in memory, semiconductor equipment, materials, chip-design software, or intellectual-property licensing. These businesses serve different parts of the industry and have different revenue and cost structures.
Do not assume every semiconductor company follows the same model. For example, NVIDIA and AMD are primarily chip designers that rely on external manufacturing partners, while TSMC operates a foundry business. Broadcom develops semiconductor solutions but also has a substantial infrastructure software business.
Who Pays?
Who buys semiconductor products and services?
Technology & Electronics Companies
Manufacturers buy chips or related components for computers, smartphones, networking equipment, storage devices, and other electronic products.
Cloud & AI Infrastructure Providers
Large computing infrastructure operators purchase processors, accelerators, networking components, and other chips for data centers. Demand depends on their infrastructure plans, workloads, and investment priorities.
Automotive & Industrial Businesses
Vehicle manufacturers and industrial equipment suppliers use chips for control systems, connectivity, power management, sensing, and automation.
Other Chip Designers
Fabless companies and other chip designers pay foundries to manufacture their designs. Depending on the arrangement, customers may also purchase packaging, testing, or related services.
Businesses Licensing Semiconductor IP
Some companies pay licensing fees or royalties to use chip-design intellectual property. This is a different revenue model from selling finished chips or manufacturing wafers.
How They Make Money
How semiconductor businesses generate revenue
Chip Sales
Design-focused companies earn revenue by selling processors, accelerators, memory, networking chips, or other semiconductor products. Revenue depends on units sold, product mix, and selling prices.
Wafer Manufacturing Services
Foundries earn revenue by manufacturing wafers and providing related production services. Customer demand, process technology, manufacturing capacity, and product complexity can influence revenue and profitability.
Intellectual Property Licensing
Some businesses license chip designs, technologies, or related intellectual property. Depending on the agreement, revenue may come from licensing fees, royalties, or other contractual payments.
Specialized Products & Solutions
Certain companies sell broader semiconductor-based solutions, including networking components, modules, subsystems, or integrated products. Reported revenue may therefore represent more than sales of individual chips.
Where the Money Goes
Where the money goes
Research & Development
Companies invest in chip architecture, engineering talent, design tools, verification, software support, and future product development. R&D is especially important in markets where products must improve rapidly.
Manufacturing & Production
Manufacturing businesses incur costs related to factory operations, equipment depreciation, materials, electricity, maintenance, labor, and production processes. Fabless companies instead pay external partners to manufacture and package their chips.
Packaging, Testing & Quality
Products must be packaged, tested, and qualified for their intended use. More complex products may require specialized processes and additional manufacturing steps.
Equipment & Capacity
Foundries and other manufacturers may need substantial capital investment to build, upgrade, and equip production facilities. These investments can create long-term capacity but also increase financial and execution risks.
Sales, Support & Operations
Companies also spend on customer support, distribution, technical collaboration, administration, and other activities needed to develop and deliver products.
What can drive growth?
Where opportunities may emerge
What can create a competitive advantage?
Advantages often take years to develop and can be difficult to reproduce.
Engineering & Intellectual Property
Specialized engineering expertise, chip architecture, design knowledge, and intellectual property can help companies create products that meet demanding customer requirements.
Manufacturing Capability
Advanced process technology, production consistency, manufacturing yields, and operational execution can differentiate foundries and other manufacturers.
Customer Relationships & Design Wins
When a chip is integrated into a customer's product, switching to another supplier may require redesign, testing, and qualification. This can support relationships, but it does not guarantee that customers will stay.
Scale & Specialized Investment
Large-scale operations, accumulated expertise, and access to capital can support investment in complex technologies. However, scale alone does not guarantee superior returns.
Reliable Execution
Delivering products on time, meeting specifications, managing supply, and supporting customers can be as important as technical performance.
How do semiconductor companies compete?
Why can competition be difficult?
What Could Go Wrong?
Important risks to understand
Cyclical Demand
Semiconductor demand can rise and fall with economic conditions, customer inventory adjustments, end-market demand, and spending cycles. Strong periods can be followed by slower demand.
Technology & Product Risk
A company may invest heavily in a product or process that arrives late, underperforms, loses customer interest, or becomes less competitive than expected.
Supply-Chain Concentration
Some companies depend on a limited number of foundries, packaging providers, or other suppliers. Disruptions can affect production schedules and product availability.
High Capital Requirements
Manufacturers that invest heavily in factories and equipment can face substantial fixed costs. If demand or utilization is lower than expected, profitability may suffer.
Inventory & Forecasting
Companies and their customers must estimate future demand. Excess inventory can lead to reduced orders, discounts, write-downs, or lower production.
Geopolitical & Operational Disruptions
Trade restrictions, regional tensions, natural disasters, utility shortages, and other disruptions can affect semiconductor supply chains and manufacturing operations.
Customer Concentration
A company that depends on a small number of major customers may be vulnerable if one customer reduces orders, changes suppliers, or develops an alternative solution.
What to Look At
Metrics to understand semiconductor businesses
Revenue GrowthYear-over-Year Revenue Growth
Measures how revenue changes compared with the same period in the previous year. It helps show business momentum, but growth can reflect pricing, product mix, acquisitions, or cyclical demand—not just higher unit sales.
Gross MarginGross Profit as a Percentage of Revenue
Shows how much revenue remains after the costs included in cost of revenue. It can reflect product mix, pricing, manufacturing costs, and production efficiency. Comparisons between fabless designers and foundries require care because their cost structures differ.
Operating MarginOperating Income as a Percentage of Revenue
Shows the proportion of revenue remaining after operating expenses under the company's reporting definitions. It helps assess operating profitability, but company-specific accounting items and business mix can affect comparisons.
R&D IntensityResearch & Development as a Percentage of Revenue
Shows how much revenue a company spends on research and development. It helps indicate the resources devoted to future products, but higher spending does not automatically produce successful innovation.
Capital ExpenditureCapital Expenditures (CapEx)
Measures spending on long-lived assets such as manufacturing facilities and equipment. It is especially important for foundries and integrated manufacturers. High CapEx may support future capacity but can also pressure cash flow.
Inventory TrendsInventory Levels and Inventory Changes
Inventory data can help reveal whether products are accumulating faster than they are being sold or consumed. Interpret it alongside revenue, demand conditions, product launches, and customer inventory because inventory can rise for legitimate reasons too.
Capacity UtilizationManufacturing Capacity Utilization
Companies Using This Model
Examples from companies covered by Scope
Primarily a fabless chip designer and supplier of accelerated computing and networking products. It relies on external manufacturing partners for wafer fabrication and other production stages. Its total company revenue should not be treated as semiconductor revenue alone without checking its reported business and product disclosures.
A fabless semiconductor company that designs CPUs, GPUs, and adaptive computing products while relying on external manufacturing partners for important production stages. Its results are affected by product mix and demand across its end markets.
A semiconductor foundry that manufactures chips for customers. Its business economics are closely linked to manufacturing technology, capacity, customer demand, capital investment, and production execution.
Designs and supplies semiconductor and semiconductor-based solutions, including networking products used in data centers. Broadcom also operates a separate infrastructure software segment, so its total company results are not purely semiconductor results.
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Scope is built for understanding businesses and industries, not for investment advice.