Weekly Reads
Weekly Reads - August 28, 2023

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In the eyes of the market NVIDIA remains the main beneficiary of AI yet the entire semiconductor value chain expects to massively benefit from the next age of computing with key investment already taking place in the background.

In their recent quarterly Applied Materials, one of the largest semiconductor equipment companies, confirmed that they see the semi-industry growing to $1 trillion in revenue by 2030 nearly doubling from 2022 at $573 billion. The company dubbed AI as the fourth and biggest age of computing and expects that the introduction of this technology will change semiconductor manufacturing, setting the stage for rapid growth for the entire value chain. Applied Materials manufactures and commercializes the equipment that the largest foundries use to develop the most innovative chips in the world. Without Applied Materials and their peers, NVIDIA chips would not exist and none of the AI technology making headlines would be possible. Applied Materials recently announced a new Equipment and Process Innovation and Commercialization Center (EPIC) to accelerate the development and commercialization of the foundational technologies needed for the next age of computing. These announcements follow Applied Materials’ entry into the EUV market and its new Vistara platform which helps reduce energy costs for large foundries. We have seen the market ascribe crazy multiples to many consumer-facing AI companies yet much of the semi-value chain remains largely ignored despite their growth being highly correlated to the most popular AI companies. The impact of AI is difficult to predict on a company-by-company basis yet it’s clear that the “picks-and-shovels” companies supporting the manufacturing of the AI hardware are well prepared to benefit from this ongoing trend. 

Value-based care could be a far greater threat to traditional pharma companies than previously realized with biosimilars increasing in popularity driving the price of drugs down and limiting the earnings power of drugs coming off patent.

CVS is launching a new business segment called Cordavis which is looking to work with drug makers to bring additional biosimilars to market. Cordavis aims to develop a portfolio of biosimilars to help drive down the cost of brand drugs that do not have market competition and expand the access to these drugs. Biosimilars are generic versions of brand drugs that have come off patent and that sell at a significantly discounted price helping reduce drug costs. Cordavis will not directly be investing in the R&D to develop these drugs but instead help these biosimilar companies with their supply chain and distribution. Cordavis is already working with Sandoz on its first product Hyrimoz which is a biosimilar for Humira that will sell for 80% less than Humira when it launches. Humira originally came off patent in 2016 and accounts for $20 billion in sales making it an obvious initial target for Cordavis. Supporting the development and distribution of Hyrimoz is crucial to CVS’ corporate goal of pushing value-based care, helping reduce healthcare costs, and improving health outcomes. Humira is just one of the many off-patent brand-name drugs that continue to rake in the billions selling at unaffordable prices due to no competition. The biosimilar market is expected to grow from $10 billion in 2022 to more than $100 billion by 2029. Traditional pharma companies might be in for a rude awakening with the largest integrated healthcare companies supporting biosimilar development that could eat into the profits of many popular brand drugs.

VinFast reaching the status of third most valuable car company is another example of how inefficient public markets can be with hype and momentum driving short-term prices regardless of the underlying fundamentals of the company.

The market efficiency theory is taking another hit with Vietnamese EV startup VinFast becoming the 3rd most valuable car company in the world behind Tesla and Toyota. VinFast sold only 7,400 cars last year almost all in Vietnam, yet shares are currently valued more than industry heavyweights GM, Mercedes, Ford, and Honda. What makes this story even crazier is the fact that VinFast listed via a SPAC; SPAC stocks have been heavily criticized by investors with many former SPACs trading below IPO prices. VinFast has all the signs of a speculative high-risk investment with a small number of shares outstanding and no clear pathway to success, yet investors have penciled in meteoric growth and perfect execution in a tough industry. VinFast is no different than Rivian, Lucid, and other EV companies which had their time in the spotlight before seeing their share price crash below IPO price as the market realized the auto industry remains one of the toughest industries in the world. We would argue that the auto industry is even tougher now with incumbents entering the EV race and Tesla reducing prices on their vehicles squeezing margins on EVs. VinFast is certainly looking like another failed hype train waiting for the first bit of negative news before shares crash leaving many holding the bag of a subscale EV manufacturer with no competitive advantage and no hopes of competing against the giant automakers of the world.