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Profiting from the Semiconductor Market

Written By Briton Ryle

Posted August 12, 2013

It looks like the economy may be re-booting for some solid future growth, as indicated by a sharp rise in semiconductor sales.

semiconductorThe latest figures for global semiconductor sales increased by 6% this Q2 to nearly $75 billion, beating Q1’s sales by nearly $5 billion. June alone accounted for nearly $25 billion in sales, which is 2.1% more than 12 months prior. Semiconductor sales in the Americas beat the global averages, rising by 8% in Q2 and 10.6% over the previous June.

“We have now seen consistent growth on a monthly, quarterly, and year-to-year basis, and sales totals have exceeded the latest industry projection, with sales of memory products showing particular strength,” Semiconductor Industry Association president and CEO Brian Toohey informed CBR.

Strength in the semiconductor space is a good indication of future economic growth. New innovations lead to new consumer products, which forces the whole world to upgrade their computers and phones to the fastest, thinnest, and coolest models, in addition to businesses upgrading their IT equipment. That means revival.

Perhaps now is a good time to revive your investments by snapping some semiconductor companies into your portfolio’s circuitry and boosting its power.

The Importance of Semiconductors

Before investing in any company or sector, we need to get an idea of how valuable its products and services are. When it comes to semiconductors, good grief… you can hardly find a product more important.

As the “For Dummies” series explains them:

“A semiconductor is a material that conducts current, but only partly. The conductivity of a semiconductor is somewhere between that of an insulator, which has almost no conductivity, and a conductor, which has almost full conductivity. Most semiconductors are crystals made of certain materials, most commonly silicon.”

In their natural state, the silicon crystals inside semiconductors do not conduct electricity well at all. When used as is, the semiconductor behaves as an insulator, stopping the flow of any current that reaches it, kind of like a closed dam blocking a flowing river.

But these silicon crystals can be modified by mixing in certain elements. Mixing phosphorus or arsenic adds one extra electron to each silicon atom, thereby changing the semiconductor’s charge to negative. This N-type semiconductor effectively swings open the dam’s gate in one direction, allowing the current to flow through with a negative charge.

The opposite effect is achieved by mixing the elements boron or gallium with the silicon, which subtracts one electron from each silicon atom and changes the semiconductor’s charge to positive. This P-type semiconductor swings open the dam’s gate in the other direction, giving the current a positive charge.

Semiconductors, then, are like little switches to control the flow of electric currents inside computer chips and electronic circuits. “How Stuff Works” describes the impact of semiconductors in today’s modern world as “monumental”, adding: “Anything that’s computerized or uses radio waves depends on semiconductors.”

Competition Creates Great Investment Opportunities

With so much depending on semiconductors, there has begun a weapons race of sorts in the development of better, faster, and cheaper components. And electronics giants are throwing all the firepower they can muster at them.

For their part, Intel (NASDAQ: INTC) and Taiwan Semiconductor Co. (NYSE: TSM) have already spent over 140% of their H1 earnings this year on capital investments, which includes R&D of future semiconductors and their materials.

Others corporations with huge stakes in the semiconductor wars are South Korea’s Samsung Electronics (KS: 005930) and the private company Globalfoundries, which used to be the computer chip making department for AMD (NYSE: AMD).

One new material being researched which could potentially replace silicon all together is graphene, a graphite-based substance with superior current conducting properties that can be arranged in layers just a few atoms thick.

Two other hot pursuits include upgrading from the industry-standard 300mm to 450mm wafers, as well as EUV (extreme ultraviolet lithography), which would permit further miniaturization of circuitry. One day, their “razor thin” products may truly be razor thin.

Intel’s former CEO Paul Otellini stressed to USA Today that the industry needs to transition to 450mm wafers and to EUV at some point. But he cautioned that “both are going to be expensive, and are going to require scale.”

Intel is hoping for precisely that – an expensive R&D war to keep its competitors at bay – as it can afford to out-spend them all. Intel generated $19 billion in cash last year, with a free cash flow of over $4 billion in H1 of this year alone. Its stock is currently trading at $22.51 with a mean target of $23.69, a P/E of 12.16, earnings per share of $1.85, a dividend yield of 4%, and most analyst ratings ranging from “hold” to “strong buy,” as reported by Yahoo! Finance.

Taiwan Semiconductor offers a slightly better target potential, currently priced at $16.21 with a mean target of $19.69, a P/E of 13.51, earnings per share of $1.20, a dividend yield of 2.5%, and analyst recommendations ranging from “hold” to “strong buy.” But its cash flow is now negative, and the company has had to raise $3 billion of debt, with more debt expected to accumulate quickly.

Samsung and Globalfoundaries are believed to be well equipped with resources to keep up with the semiconductor arms race. Samsung recently reported a net income of $6.8 billion in Q2, while Globalfoundaries is a joint venture with Abu-Dhabi-based Advanced Technology Investment Company, so you know it’s sitting on a large wallet of its own.

Besides investing in individual chip makers, you might find the semiconductor sector as a whole to be less risky of short-circuiting. The SPDR S&P Semiconductor ETF (NYSE: XSD), though with little daily volume of just 10,000 shares, has gained an impressive 19% over the past 12 months. Its rival, the iShares PHLX Semiconductor ETF (NASDAQ: SOXX), with a slightly more liquid daily volume of 35,000 shares, has gained 17% over the same period.

Given the critical role that semiconductors play in this modern age of computer and telecommunication electronics, the space is easily a must-have component in any portfolio’s circuitry.

Joseph Cafariello


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