Chit Chat Stocks - Kulicke and Soffa (KLIC) with Chris Seifel

Episode Date: October 28, 2021

Kulicke and Soffa concentrates on semiconductor packaging. However, the company has many segments including the manufacturing equipment and tools to assemble semiconductor devices. Kulicke and Soffa plays a role in close to 80% of all semiconductor production. Chris brings his expert knowledge of Kulicke and Soffa for a great discussion regarding the history and future of the company. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Subscribe to 7investing with the code "CCM": https://7investing.com/subscribe/aff/4/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Chris's work? Follow him on Twitter: https://twitter.com/2ChaseGreatness?s=20 Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps Kulicke and Soffa Industries | (3:55) Valuation & more | (22:46) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today, we have an interview with Chris Seifel, and we talk Kulik and Safa Industries. I believe I'm getting the name right. Sorry if I'm not. It's in the semiconductor space. Pretty interesting. He gives a really good primer on sort of the whole, not necessarily the whole industry, but the company and what they do, because it is complex, but it kind of dumbs it down for us because we are novices kind of in that industry. Any highlights for you? Yeah. So great overview of them in general, but I like to talk about their growth avenues within LED stuff and electric vehicles, potentially. LEDs is the main one. And then also talking about

their management and then the industry as in general, kind of the risks and potential, you know, there's the cyclicality or the history of, you know, the cycle of the semiconductors, whatever. It's kind of like all sort of industries like that, but also the long-term growth of the industry is it kind of powers all the new technologies coming online and it's pretty cheap which is kind of nice because we you know there's a lot of more expensive things out there today and this one was not yeah he gives a great overview of the valuation where they're sitting at the moment their history of capital allocation how much cash they have all that good stuff okay but before we get to the interview we want to talk about our friends at quarter we officially

have our banner now so we're going to hang it on the wall uh it's not up right now it's sitting next to me, but it's big. And if you're one of the five viewers on YouTube, you're going to be able to see this thing. It's wonderful. I think we might be the quarter studio now. But for anyone that doesn't know, quarter is basically an investor relations app. You can get any company you want. You can listen to their conference calls at two times speed if you're a really fast learner, or you can read their investor presentations. There's transcripts as well. They've got a lot of stuff in there. I've never once looked up a company and not had it on there. So they've got companies from over 15 markets. They can also, users can now leave

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ahead. Use that code CCM. Without further ado, let's get to the interview. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Today, we are welcomed by Chris Seifold. This is now a second-time guest. I believe the first

time you came on, what company did you pitch the first time? Unity. I'm drawing blanks on it. Unity. It was Unity. Unity, that's right. Yeah. Yeah. Today, we have a different company, and I'm probably going to butcher the name, but I think it's Kulik and Safa Industries. It is not a furniture store, as we just discussed. So I'll let Chris kind of get into it. Do you want to describe their role and who their customers are, kind of what they do? Sure. So, and thanks for having me back. A huge fan of the show that told you guys, I don't miss one or I try not to miss one. So excited to be here. So Hulik and Sofa, the main business is set-being inductor packaging. And so to simplify this best I can,

And once a chip is made, so once a chip is made on a piece of silicon, it is then put into a package to not only protect it, but also to connect all of the transistors, capacitors, et cetera, on the chip and other pieces of whatever sort of compute that you're putting it in. So the packaging serves a really important role. And so if I'm to quickly describe the semiconductor manufacturing process, you know, you have the design or you come up with chip design, you send it off to a foundry or fab, and they will make a huge wafer with a bunch of different silicon chips on it. And then those chips will then be put into the package, tested, et cetera, and then sent out to end markets. And so where Kulik and Safa plays is in that kind of middle ground, which you would refer to as the back end of wafer fab equipment.

And that packaging is done really mostly like, yeah, in the later end, although it's starting to be contemplated on the front end because of the importance that packaging is now having on improving power, performance, et cetera. And so now Hewlett-Packard has gotten a lot more publicity lately because of their growing importance in the industry. So that's kind of the high level of what they do. Their main competitors are ASM Pacific and BE Semi. There's also another company called Shinkawa. But those are the two primary competitors. And BE Semi is really the leader in advanced packaging, which is, you know, as we're going to more advanced processing nodes, these different packaging types like TSB, which is, you know, or TCB rather, which is thermal compression bonding or hybrid bonding, that's what's being used as we move forward.

But Qlik and Safa is not the, it's not a monopoly, but they have about 60% market share on what's used for most of the trailing edge and even still a lot of the, you know, advanced nodes, which is called the wire bonding. And so wire bonding is used in about 80% of all semiconductor packaging. So if you took a big step back, Kewlick and Safa is really playing a role in 80% of all chips that are produced, and they are, they have 60% of that market. So when you, and a really good example, I think for listeners would be, you know, when you hear about Apple having delays with shipping, I think it was, you know, the iPad a little while ago. And now it's with the Macs and the iPhones. The iPad specifically was a function of a huge backlog. And everyone's been familiar

with the chip shortage on the packaging side. So it plays a very important role without the capacity that's provided by Hewlett-Packard and Sapa, everything's basically delayed on the back end. So they're an important company that nobody really knows about, but I follow pretty closely because of where they sit in the value chain. Okay. And just to maybe clear things up, who are they getting their parts from, or is it just basic materials? And what is an example of their customers? Yeah. So an example of their customers would be any foundry uh idm or even osat which is an outsourced uh like semiconductor assembly and test company there and so an example would be on the foundry side it would be like tsmc

or idm would be samsung intel etc um osap would be like ase um and a lot of the kind of the big players there and their suppliers are yeah it's a lot of these just basic materials other just you know pre-made components that go into the equipment that they make and so uh it's it's interesting actually because there was a backlog in their suppliers they had a backlog as well but uh yeah that's that's kind of where they sit between the middle of basic materials and you input component equipment companies, Kulik and Safa, and then either the testing and assembly companies or the actual manufacturers of the chips themselves. I saw that Tesla is a top 10 customer. Where do they fit into? Yeah, that fluctuates. They've been in there and out.

So this is something that I'm not giving a lot of attention to, but Kulik and Safa's wire bonding technology can be used for battery packaging and so that's where they come into play and so if you look at uh when tesla had their battery day a little while back some of the processes or at least one of the processes i remember looked very much like uh kilik and safa's ribbon packaging technology and so they do sit in there as well and yeah i think we can get into it maybe later in the show but the electrification of cars is actually a big tailwind for for kns so uh yeah tesla is uh they are a top-ten customer sometimes all right and what is your overall thesis on kns uh why do you like the stock going forward sure so we can maybe break it up into valuation and then

fundamentals. On the valuation side, it's, I would say, egregiously cheap. So it's trading at about right now six and a half times my 2023 earnings estimate. And I think it's about 11 times right now forward earnings. And that is in the context of them having about 20% or so of their market cap in cash on the balance sheet. So a ton of optionality and safety while trading at really, for them, historically low multiples, one, but also two, relative to their competitors, they're trading at about a 26%, 25% discount to their competitors, when historically they've traded essentially in line. So you have a really big margin of safety. And you can think about it very simply as an intrinsic value gap as a margin of safety. And that's on the valuation side.

really, to me, like a safe bet and a value bet in a way, which is not usually the area that I would say that I fish in. But on the growth side, which is a lot of what I focused on, I'll frame it this way. Historically, about, let's say, 80% to 90% of all equipment spend in the semiconductor industry went to the advanced leading-edge nodes, which was, like I mentioned before, I think more of the technologies that benefit the BE Semi and some of Qlik and SOFA's competitors with the more advanced packaging technology, which Qlik and SOFA does, but they have a smaller market share. But that is starting to inflect and balance out between advanced and leading edge, advanced and trailing edge rather. And trailing edge is where

Qlik and SOFA really dominates. And so you have an inflection of more share going towards where Hewlett-Packard dominates. The example recently would be, I think it was Wednesday or Thursday when TSMC announced their earnings. They're building a new 22, 28-nanometer fab in Japan, which is specifically for the autos and industrials of the world, which is going to use mostly Hewlett-Packard packaging technology. You have a really big tailwind with just the entire industry and what is being spent and where the spend is going. That's going to dominate for Cubic and Safa. So the company has massive, massive tailwinds. And then there are other things too, like operating leverage inherent in their model. They have really other nice bets

they're making in growth drivers, like midi and micro LED. And so that's all really gravy on top of the core semiconductor business, which has really strong tailwinds behind its back. Well, we'll talk about both of those. So let's start with operating leverage. I know that's something you mentioned in your write-up several times. What kind of gives them that operating leverage? Yeah. So they have a very high fixed cost structure of, I believe it was about 54, $55 million run rate of fixed costs every quarter. And then the variable cost component is about, I think it's 2% of revenue on top of that. Right. And so the way to think about it, and this is based off of a assumption of six and a half percent semiconductor unit growth

year over year, which is basically the historical average. And so anything above and beyond that is really just gross margin, if you will, or operating margin, if you will. So that fixed cost structure, which is pretty much fully loaded, everything with commissions, etc um once when the industry grows like the way it has this year especially as a good example you're going to see their operating margins start ticking up so i believe last quarter their operating margin was about 30 maybe like 29 and a half or so uh and you look maybe historically at 2019 and they were closer to like 15 or 20 and so you really start to get a lot of that leverage coming in as the semiconductor market itself grows. That's on the core business.

They're also starting to build out like a lot of these other equipment companies have. They have this aftermarket parts and service business, which you can think simply as they're providing one service on the existing unit base or the number of systems they have out there, which my last count was about 160,000. And so you have service agreements where you have recurring revenue coming from just servicing that existing technology, whether it be improving performance or just typical maintenance, and then also providing spare parts, which whenever there's something that goes wrong with the equipment, they'll send out a spare part and that's another revenue stream. And so an increasingly greater portion of their revenue

base at a higher margin is this APS segment, which also makes it a more or a less cyclical business, all else equal. So I think they're about 12% or 13% now on that APS side. So a lot of things are contributing to a higher margin base. Okay. And one thing I wanted to maybe touch on is, so you said they have 60% market share and they probably had that for a while, I'm assuming. Why is it difficult to get into this industry? What kind of moat do they have? Yeah. So they have 60% of the 80%, right? Of all wire bonding. And that other 20% is the advanced, more advanced packaging, which they have some sharing. So why is it difficult? A lot of it comes down to trust with the suppliers. The trust side is actually really important in the semiconductor industry. That's kind of one, and a little bit more soft and qualitative. but uh two the amount of engineering expertise that's required to be a major player in these different segments is high and two the capital required to get into the business at the start

is also high so those those i would say are the the barriers to entry and it's difficult too because if you think about how the industry or any real technology progresses right it you kind of build on top of itself. And so, to be the leader in the next technology that's going to be available for the industry, you kind of have to be on the ground level and then build on top of that. And so, if you're not already a competitor like a BE Semi or anyone else like a Shinkawa, et cetera, or ASM, it's really hard to then just jump right in and become a competitor from day one on top of the fact that you have the relationships already built. So, that's really kind of the boat there. Okay. That makes total sense. And one thing I think that was highlighted

either in your write-up and on their investor presentations, I think we just saw some news of Apple, but I'm forgetting what it was, is the mini LED business line. What potential does that have? And can you explain kind of how they are in that supply chain? Sure. So let me start with be how they got into the space, which is an example of, so the CEO, Fuzin Chen, he became CEO in late 2016. Up until that time, the company was very conservative with capital allocation, but he's kind of come in and really changed that around where they're making, like I mentioned before, these really high probability bets. And this mini micro LED business is a good example of that so this was developed through a partnership with a company called rohini

now forgetting the founder of rohini's background but it's it's really impressive with where it came from but this partnership uh is what got them into the space and then they also just acquired recently a company called unicarta which it's really the technology and the ip that they acquired unicarta for and so that's kind of the background of how they got into the space Now, let's start with the mini-LED side, because micro-LEDs will look further off. But mini-LED is kind of the next evolution of LED, like light-emitting diodes and liquid TVs and whatever it may be. What it will allow for is better contrast, deeper colors, etc. That's because of the technology itself. Why is Qlik and Safa, one, a logical fit? What is the

synergy there with their wire bonding business it's a very similar technology where for let's just talk about their their core product right now for the mini led side is called pixelux which is more of just like a pick and placement type of uh type of technology that's the rokini partnership there what that does is very similar to wire bonding where it's taking you know these light dimming these diodes and putting it almost one by one onto like the onto the substrate you know where the screen would be the difficult part there and why it's hard to scale that is because i believe that they're able to do about 50 placements per second when which it's hard to kind of put that in a relative standpoint but when you understand that an ipad has about 10 000 of

these little mini LEDs, then you can think, well, holy crap, that's a long time we take just to produce one. And so that's where the Unicarta acquisition comes into play. And from my understanding, nobody else has this capability. What Unicarta does, it's basically laser-based placements. And so to summarize, instead of doing 50 placements per second, the Unicarta technology allows for 10,000 placements per second. So one iPad per second, if you will. And so that's kind of how they're, and that's where they should be the leader in mini and micro LED because of the yield that they're able to generate through this newer technology. And so it's really an exciting space for them because they're probably at about $80 million

or so run rate of revenue for this mini LED business or advanced lighting business. and they should probably be around 300 million or so within the next couple of years, say 2023, 2024. So it was a huge growth avenue for them. And that's also where the entire lighting industry is going. So they're starting to develop a really important place in that space, especially with the partnership with a company called Epistar, which is really the leader there. So yeah, it's a big growth avenue for them and something that they've been really working on developing over time. And they're Luminex. So you have Pixelux, which is kind of the older school technology the luminex which is the newer school uh the laser

based one that luminex equipment should have a really good hold on the market share um as we go forward okay and what about automotive um you know there's talk about the growth they could have with the transition to electric vehicles how will that impact kns yes i mean the electric vehicle uh you know how things are progressing there it's really a a microcosm of the broader trend with all electronic, which is you have increasing silicon content per unit. And so that's kind of the general trend with autos in general, but also with electric vehicles. And so that's a huge driver for them is just increasingly more silicon content in these cars, especially because a car is like a computer basically now. The amount of, and you see it

with all the headlines, but the auto shortage and the semiconductor shortage, how it affects the auto industry. And so what people realize is there are countless different semiconductor components and microcontrollers that go into these cars. These microcontrollers use the wire bonding packaging technology because it's on the more trailing edge, if you will, technology. And so all of these MCUs and any of these lagging edge technologies that are going into the cars are really using Hulik and Safa's technology. And so the more chips that you start having in these cars, the more that you're going to have utilization of K&S's technology. So that's really a huge, just broader tailwind for autos. The electric vehicles will have even

more chips on top of your traditional cars today. And then I mentioned the battery technology that they're developing that's a whole other growth avenue for them that's i'm not even contemplating growth of that in my model but it's huge upside that if you have tesla already using it then it's hard to imagine that you're not going to have other players trying to get into the space also looking at q looking soft for that you know battery packaging technology right and i think we've seen what i don't know commitments of like 100 billion from all the auto makers and capex over the next decade so that I mean there's plenty of dollars to go around but sorry Ryan you want to yeah I mean we uh I have plenty more questions but we gotta hit a quick ad break uh before we get to the second

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all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply okay welcome back in i forgot to ask this right from the start but how big is coolik and safa yeah they're right now about a three billion dollar company, I believe it's, it came down. They, so the shares overall, they ran up to about, I believe it was $70 a share or so, um, late August, whatever, maybe, maybe it was like early September, late August. Since then, uh, the shares have really just gotten plummeted. Uh, they've gotten hit hard and now they're about $50 a share and $3 billion market cap. So relatively small. was there a reason for the recent plummet or is it kind of just i believe no i think it's because

there are these fears of cyclicality and a downturn in the semiconductor cycle that really that really drove at least the catalyst for the for this downturn and then you had micron two weeks ago two or three weeks ago issue a very soft report and soft guidance uh which also impacted Kulik and Safa maybe more than others. One thing to realize is that, you know, these smaller equipment players, they're going to have higher beta. And so however, you know, the SOX or semiconductor industry is performing, you're probably going to see, you know, quite a bit of beta on these smaller names. That's one. And then two, it's, you know, I've mentioned different parts of the value chain for semis. You can think about these back-end equipment players,

like the testing and the packaging companies, they have a big bullwhip effect from whatever happens in the broader industry. And so it's like any typical system, right? You have feedback loops and the backend technologies have the longest lag in terms of the information that comes back down to them. So you're going to see bigger fluctuations and bigger cycles for these guys. And so if the industry or investors start getting weary or worried about a downturn in the cycle, then you'll probably see these guys be hit harder than others what do you think about management um just generally and then also their sort of capital allocation strategy i think i saw that they have a buyback program going still um but that might have been old that was from the 10k so

maybe they still do yeah no they do uh the buyback program i believe goes through august 2022 if i'm remembering correctly and i think they they just bumped it last year like another $100 million. So it was like a $300 or $400 million program, and they still have quite a bit of capacity left there. They do have a dividend. I believe it's still about $0.48 a share per year. That's because they just can't find enough investments and projects to allocate all the free cash flow that they've been generating. So that's kind of on the capital allocation side. I mentioned the investments in mini and micro LED, which is a great bet for them. management, Fuse and Chen, I mentioned he joined the team as CEO and on the board back in October

2016. And if you look at Hewlett-Packard's performance before he joined, and then you just look at that inflection period to after, you'll see that over time, the operating model radically transformed from a very highly cyclical, low margin, negative margin business to one that's lot more stable, pretty consistent, 20% operating margins. And he's really been at the forefront of driving that operating leverage like we talked about before. And so all the things that he's done since he's taken over have really made Kielken Safa as less of a cyclical business as possible. And so really impressive what he's done there. His background, he's at Applied Materials for years. He was at, I believe, Novellus for a while. And then he was the CEO of a smaller

semiconductor company until he left to join Kulik and Safa. So he has about a 30-year-plus history in the industry. You look at the share price performance, and I don't have the top of my head, but I believe it's been like a 40% CAGR since he took over in 2016. So he's really done great for shareholders. He's great for the business. And in my right, if I go into detail on the comp plan, and so I'm going to forget the exact specifics, but it's very much performance-based on the operating side, which is something that I like because you're not driving share price performance just based off your own comp package, which that's how you can get companies and investors into trouble, but rather it's performance-based on the operating model.

And the question I think that investor would ask is then, well, what happens during these downturns when you get disincentivized to do well? A great part of this comp package, which is why another part that I really like the board that they have, is that there's also a component that is a relative benchmark to their competitors. So it's not just absolute performance of the business, but also relative to performance versus competitors. So a lot of incentive alignment, if you will, for the broader management team and the company to do well. All right. We talked about valuation a bit, but what are some important metrics that you're following for KNS's performance, say, over the next few years?

Yeah, it's interesting. So a lot of these equipment players, they're going to be levered to the unit shipment growth of the semiconductor industry. So that's a very macro data point, but it's something to watch. So the operating model that the company gives out is based off of six and a half percent growth per year for unit shipments, which is the historical average in the industry. And so that's something that I'm really watching is how does that fluctuate up and down? And that will then drive how the company performs, the amount of operating leverage, et cetera. Another thing I'm looking at is, and I'd say the key drivers, it's really the success of this mini and micro LED business, since that is the big growth driver. And then another thing to look at too is, what's our install base?

How much equipment do they have out there? Because that then drives the aftermarket parts and services business, which I mentioned is higher margin and recurring revenue. So there's some of the key things there that I'm looking. And then you just obviously want to make sure that parts of the thesis are going to always be intact with the operating leverage or their fixed costs truly, you know, 58, $55 million per quarter, which you can easily do the math to back into. And then, you know, the price and mix, right? Like how much of their equipment that they're selling are these wire bonders, which

is lower margin. So even though they have a monopoly, not monopoly, but a large share of the market, you know, it is still a lower margin, worse business than this advanced packaging, which they're also in. So how much share can they take with their thermal compression bonding, their hybrid bonding, the advanced packaging equipment that is higher margin? Those are probably the core things that I'm really looking at. And on the valuation side, sorry, you asked about valuation. I mentioned at the top that they're trading at about six and a half times my 2023 numbers. Right now they're trading at nine, maybe nine and a half times blended forward earnings numbers, which is just so egregiously cheap when you have about, I think it's like

$10 a share of cash on the balance sheet and you have the competitors trading at about 26% above that. And so you have really this nice margin of safety there for the company that once I believe, once these fears of a semiconductor cycle downturn are somewhat more alleviated, you'll start seeing that rebound come back pretty quickly. Okay. And then the big concern, I think, at least for anyone that's an experienced investor in this industry, they're probably in the back of their mind. They're thinking cyclicality, downdraft. And that's the big question is, is there a demand shock coming? How do you think about that risk? And is cyclicality a big concern here for K&S? Yes. So maybe working backwards, cyclicality is,

let me start this way. Yes, because cyclicality will, like I mentioned, have a bullwhip effect on down cycles. You're going to see K&S hit harder than like in applied materials or any company more on the front end equipment side. So cyclicality is probably the biggest concern here. And a part of why they trade at a pretty low earnings multiple relative to the S&P is because of the sixth cap. But there are kind of two components to think about when it comes to cycles and the semiconductor cycle? I'd say one is that you're seeing pretty substantially and what we should see going forward is a less cyclical business for Kewlick & Sotho. We talked about, one, the aftermarket parts and services business,

which is more stable revenue, recurring revenue. That's right now, say, 10% to 12% of revenue. I have that building slowly to about 15% of revenue by 2023. And so very incremental, but you're dampening the impact of future cycles. That's one. Two is packaging, as I mentioned, is becoming contemplated more on the front end as part of design. And so the company will have better visibility into their demand moving forward. So historically, this company was hesitant to even give next quarter guidance. But now they're able to give guidance actually through 2022. And they've been able to do this for the past couple of quarters because of the demand backlog that they have. So right now, I think that last quarter, the demand backlog was

about 800 million or so. And the company is doing, let's say like 1.3 billion in revenue. So you have about half a year, more than half a year of revenue already sitting there for the company to realize. So they have better visibility, which should be a trend moving forward. I wouldn't say it's going to be as great as it is now, once you see these lead times start coming down. But that's a huge benefit for the company. They have about almost a year of visibility right now. So just less technicality and better kind of guidance and visibility into the future. And then the last part on the cycle side is the overall semiconductor industry itself. So yes, historically a very cyclical business and industry. Of course, with any type of Adam-based

business, it's a typical economic cycle where you have demand exceeding supplies, you have buildups, and you have companies coming into the space when you have this discrepancy between returns and cost of capital, but that gets computed away over time. Then you have overbuilds, and so you have down cycles uh and that's what the semiconductor industry has experienced historically and we'll still have cycles in the seven in the semiconductor space but i think they'll be more muted and you've actually seen that starting to play out uh over the past couple cycles so um and that you can just look at you know what are the differences in you know in the growth rates of you know equipment spend anything you want to kind of think about there uh and we'll see that playing out

moving forward. And why is that? The biggest driver is that as we get more and more advanced technology nodes, so smaller chips, right now we're at the marketing term being five nanometers with three nanometers being built out by TSMC and Samsung, et cetera. As you get more and more advanced nodes, it's harder to build these chips and it requires more process steps. So it takes longer to build, to produce the same number of chips. So it'll be harder to get supply to meet demand all else equal, right? And that's on the demand side, on the supply side, rather. Moore's law, however you want to think about the different laws that are governing the semiconductor space, it is making it more and more difficult to produce chips. So supply is somewhat constrained,

all else equal relative to history. On the demand side, you have massive secular drivers, like artificial intelligence, 5G, which you can say is more cyclical as we go into 6G, and then IoT, et cetera, massive demand drivers that really haven't been contemplated or it's hard to understand the magnitude of what these drivers will have on the industry itself because data growth is exponential. Right now, I believe that the numbers, I can't even rationalize myself, but we should be producing like 180 zettabytes of data by 2025. It's some crazy number. And all this data, it has to be processed with CPUs and GPUs and has to be stored somewhere with memory chips. And so that demand is just going to be proliferating moving

forward, in my opinion. So I think you have a massive semiconductor super cycle right now with a very positive supply and demand dynamic playing out. I don't want to make it seem like cycles are gone and that we're not going to have them. We definitely will, I think. But right now, at least for the next few years, especially given the visibility that some of these fabs are giving with their CapEx spend,

whether it be TSMC spending $100 billion plus over the next three years, Samsung at like $170 billion in the next three years, plus more out for the next decade. You really have, I think, a good setup here for a less cyclical business, but also very strong demand push moving forward. If you were writing an investment pre-mortem for this company, as to why the investment does not work out, what would be the major factors?

I did that. So that's going to be a write-up, so that's easier. One is, we can start very simply, right? You know, it'd be the competitive landscape changes, you know, where, you know, Bessie or ASM moves down market into either moves down market into the more traditional wire bonding space and capture share or Qlik and soft is unable to capture any additional share on the advanced packaging side. Also, you know, kind of along those lines, we need to talk about on the business side, they're unable to gain traction with this mini and micro LED business, which is a huge driver of that revenue growth. So that would then just keep fundamentals really constrained. And you're not going to hit that six and a half earnings multiple that I see in 2023. On the operating leverage side, if the actual equipment itself becomes more expensive for

the company to produce, if inflation is more permanent instead of transitory, et cetera, you're going to see that operating leverage start to diminish. That could be another thing. And then maybe I'm wrong on the semiconductor industry itself. Maybe AI and these 5G and all these other paradigms really don't require as many chips as I think they will. Or if there's some sort of innovation where we're able to really ramp the processing power per watt of these chips, then there would be less unit ship and volume, which, as we've talked about, is really the main driver of K&S's business. So those are a few things that I kind of think about when it comes to, you know, what might happen if, you know, how could this investment have fit?

Okay. Do we want to hand any Twitter questions? We can't forget those because... I mean, you touched on most of them. Yeah, we touched B, or the one on B semis. What about, you may have, you touched on this a bit. What about the alternative packaging? Someone was concerned about alternative packaging, eating into KNS's future prospects.

I think you mentioned that, but maybe if you could go into more detail on that one. uh definitely and it's i'd say a valid concern you know i'll start with this you know going back to about the 2000s and i think i wrote about this in my write-up too uh the industry was very excited talking about hybrid bonding uh which is and even tcb as well you know thermal compression different patching techniques like flip chip etc um this was all like contemplated back in the early 2000s mid-2000s and it hasn't played out and so it's almost similar to like the broadband discussion with Charter. Forever and a day, you've had these concerns about us moving off broadband. It hasn't happened yet. And so I'd say, one, until we can see clear guideposts of

wire bonding itself having less of share of the entire industry, then it wouldn't be as much of a concern for me. And two, the company, like I mentioned, they do have these TCB and hybrid bonding products, these advanced packaging products. And so even if advanced packaging does become more of a mainstay, which with heterogeneous integration, it should, the company itself isn't completely just out of that market. And so that should be somewhat muted when it comes to any potential of advanced packaging, having a bigger share of total packaging and that hurting K&S. Okay. Another question we got from Twitter, And I apologize in advance if we missed any Twitter questions, but it was around their dependence on wire bonding.

Does that concern you at all? I think these two questions are somewhat related, right? So can I maybe simplify it? Is the advanced stuff, is that going to take away from wire bonding? Because as someone who doesn't know the industry, it's a little bit confusing. Does that take what wire bonding's demand used to be, goes to these advanced systems? I want to say yes, just because these advanced technologies are what's used mostly for the advanced nodes. That's really the exciting stuff, right?

We're going to three nanometers, two nanometers, which is just mind-numbing how small that is. Well, like I mentioned before, the fabs, all the spend, a lot of the discussion is this transition from that 80-20 split between spending on advanced versus trailing edge. And now it's moving to more 50-50. So if anything, I think you get surprised at the upside on wire bonding. but uh if that does change it's definitely a concern right because the company is going to be more levered to how wire bonding does in terms of total share so yeah i mean i'd say it's definitely a concern i would say that it's a smaller probability though that that happens okay i think that that makes a lot of sense yeah that's all the questions we have right

yeah uh we should talk about where you know where can people find you and you just started out at a Titan Invest. So maybe talk about that a bit. Yeah, definitely. So very fortunate to have joined the team at Titan. You can find us on Titan.com. What Titan is, is essentially a hedge fund, but for everybody, for all retail. You don't need to be an accredited investor to invest in Titan. We have separately managed accounts, et cetera. We have about 750 million AUM uh growing really fast you know we have three different strategies uh one being you know large cap domestic you know your traditional compounders uh like netflix apple microsoft etc we have a small mid-cap uh strategy which is more opportunistic and we have an international

offshore strategy as well we also have a bitcoin uh strategy which people can invest in and so i've been there for about four months now and just loving it learning a ton uh ramping on coverage i'm covering semiconductors software really just all technology there we're generalists but that's kind of how where i focus uh people can find me on twitter i think my what's my handle now it's like to chase greatness i think it is i think that's right yeah yeah twitter uh i had to change my my uh my tab my handle for compliance purposes and then i'm on linkedin whatever may be uh feel free to reach out anytime happy to share ideas and uh if you want to pick my brain or i can pick your brain even uh yeah we'd love to love to connect and you uh you still write for the

newsletter right the sub stack unfortunately i can't so all of my i cannot write so all of my writing has to be done through titan so uh but i do you know a lot of the content we put out some of that is you know from my own writing uh so that's kind of where a lot of the my writing is done now i for the first like four months three months or so of me joining titan i took a huge step back from twitter from a bandwidth perspective and just not really not really having a good feel of what i could and could not tweet about but start getting back involved there so you know if you ever want to just kind of see what's on my mind or how i'm thinking about markets or investing etc you can just like go to my twitter and uh if you want to

troll me troll me if not you know i'd love to have some good quality uh conversations with people There are plenty of those out there. Yeah, there's plenty of both. All right. I think that's going to do it. Thanks to Chris for joining us. I'll try to hit the disclosure without botching it here. So Brett and I are not financial advisors.

Anything we say or discuss here on Chitchat Money is not formal advice or a recommendation. We are, however, general partners at Arch Capital. So clients may have positions and securities discussed in this podcast. Thank you all for listening. We'll see you next time. Thank you.