OMG SMH

The Engine of the Future

Computer chips are no longer just components inside a laptop or a phone — they have become the foundation of nearly everything we do. In recent weeks, we have heard a version of a familiar concern: if the data center buildout is slowing down, why are chip stocks still going up? It is a fair question, and we think it deserves a direct answer. Because the answer reveals something important about how we think about this industry — and about investing itself.

SMH, the VanEck Semiconductor ETF, has returned over 120% in the past year, currently trading above $506. It rallied nearly 40% off its March lows. And it has done this during a period when headlines have been filled with stories about data center delays, power grid shortages, and hyperscaler projects falling behind schedule. To understand why, you have to separate two things that the market often conflates: the pace of construction and the depth of demand.

The Bottleneck Is Not the Blueprint

The four largest hyperscalers — Alphabet, Amazon, Meta, and Microsoft — have collectively committed approximately $650 billion on AI infrastructure across 2025 and 2026. Yet the facilities meant to house that investment are falling behind. The most critical bottleneck is not computing chips or GPU supply — it is the electrical infrastructure required to deliver power to these facilities. Transformers, switchgear, and battery systems are in severe shortage. In other words, the demand for chips has not gone away. The buildings to put them in just cannot be built fast enough.

AI-optimized data center facilities now require 100 to 500 megawatts — enough to power entire cities — and the grid simply cannot keep up. This is a construction and energy problem, not a demand problem. The capital commitments are real. The orders are real. The chips are being designed, manufactured, and purchased. They are simply waiting for somewhere to go.

Demand Is Broadening, Not Shrinking

There is a second, equally important point. Even if data center construction slowed permanently — which the evidence does not support — the semiconductor industry's growth story would not end there. The "physical AI" inflection is moving humanoid robotics and autonomous systems from pilots to core infrastructure, creating a massive new hardware demand cycle that has nothing to do with server farms. The chip driving a warehouse robot and the chip powering an AI inference engine are different products, but they come from the same industry.

AI chips are now 0.2% of all chips manufactured but account for roughly 50% of total industry revenue. That ratio tells you just how early we are. The vast majority of the world's devices — cars, industrial equipment, medical instruments, consumer electronics — are still running on conventional chips, and those markets are beginning to benefit from the same AI integration wave that has already transformed the data center. The engine is not running on a single fuel source.

Mental Compound Interest

We talk often about a concept we call mental compound interest. The investors who benefited most from the recovery off the March lows were not the ones who read the data center delay headlines and sold. They were the ones who asked the next question: is this a demand problem or a delivery problem? That distinction matters enormously, and training yourself to ask it — calmly, repeatedly, under pressure — is a skill that compounds just like money does.

The global semiconductor industry is expected to reach nearly $1 trillion in annual sales in 2026, a historic peak, with growth projected to accelerate to 26% this year. The data center slowdown is real, but it is a scheduling problem inside a structural supercycle. Our confidence in this sector is not a bet on any single application or any single quarter. It is a position built on the understanding that the world is becoming more compute-intensive in every direction — and that patient, disciplined investors are the ones best positioned to benefit from it.

Stay focused on the journey ahead.

Magna Carta Wealth — This paper is prepared for educational purposes and is intended for friends of the firm. It does not constitute investment advice. Past market behavior is not indicative of future results. Please speak with your advisor before making any financial decisions.