What in the world is a semiconductor and why is it the backbone of artificial intelligence?

In the midst of the artificial intelligence revolution, many investors might be looking to add exposure to this global industry. 

Since 2022, it has fuelled the S&P 500 Index (SP: .INX) to record high after record high. 

So just how much money are companies and governments pouring into AI?

Earlier this month, OpenAI, (the company behind Chat GPT) signed one of the largest cloud contracts in history with Oracle – $300 billion worth of computing power spread across roughly five years.

Frank Holmes, CEO and chief investment officer of U.S. Global Investors Inc (NASDAQ: GROW), said earlier this week on the rise of AI: 

Last month, Intel made a historic deal with the Trump administration. The government announced it would take an $8.9 billion equity stake in Intel, in addition to billions in CHIPS Act grants. (And just this week, Nvidia said it would be investing $5 billion in the struggling tech firm.)

I believe the message is loud and clear: Semiconductors are strategic assets like oil and critical metals, and Washington is willing to invest taxpayer money to support them.

But let's take a step back. 

What are semiconductors?

A semiconductor is a special type of material that can control electricity – sometimes it lets electricity flow, sometimes it blocks it.

Because of this property, semiconductors are the building blocks of modern electronics. They're used to make microchips, which power everything from your phone to cars to medical devices.

Think of semiconductors as the "brains and nerves" inside electronic devices.

Why are they so vital for artificial intelligence?

Artificial Intelligence (AI) relies on massive amounts of data processing. To run AI models, you need chips that can handle:

• High-speed calculations (processing billions of pieces of information per second).
• Parallel processing (doing many tasks at once).
• Energy efficiency (since AI uses huge amounts of power).

Training and running AI models requires huge numbers of chips and tech giants (NVIDIA, AMD, Intel, TSMC, etc.) are racing to supply them.

Additionally, countries see semiconductors as a strategic resource (like oil in the past). There's heavy investment in domestic chip production. The next breakthroughs in AI depend on smaller, faster, more efficient chips. Whoever leads in semiconductor innovation will likely lead in AI.

If data is the new oil, semiconductors are the mines and refineries that turn it into usable energy for AI.

According to Global X, sector revenue is expected to expand by 38% over 2025-26, supported by hyperscaler investment and the diffusion of AI workloads into various industries.

How do investors gain exposure?

Like any investment theme, you can choose individual companies engaged in this field. 

You could consider investing in blue-chip stocks like:

• Nvidia (NASDAQ: NVDA)
• Taiwan Semiconductor Manufacturing (NYSE: TSM)
• ASML (NASDAQ: ASML)

Another option to gain more diversified exposure is to invest in an ASX ETF that tracks this sector. 

One that has brought strong returns in the past year is Global X Semiconductor ETF (ASX: SEMI). 

The fund focuses on companies that stand to potentially benefit from the broader adoption of tech-enabled devices that require semiconductors. This includes the development and manufacturing of semiconductors.

At the time of writing it has 30 holdings in this sector. 

The post What in the world is a semiconductor and why is it the backbone of artificial intelligence? appeared first on The Motley Fool Australia.

Motley Fool contributor Aaron Bell has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool Australia has recommended ASML and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2025