By Patrick Sietz
The semiconductor industry is notoriously cyclical. As such, semiconductor companies are subject to the ups and downs of regular chip cycles tied to the law of supply and demand.
When conditions are favorable, chipmakers have trouble keeping up with demand. But when supply exceeds demand — either through overproduction or a pullback in end markets — prices fall. In turn, so do chip manufacturing levels.
Investor’s Business Daily divides semiconductor companies into three groups: chip manufacturers, fabless chip companies and chip-equipment makers.
Chip manufacturers own their fabrication (chipmaking) plants, while fabless chip companies hire contract manufacturers to make the chips they design. Chip-equipment vendors supply the gear and materials used to produce semiconductor products.
Is The Semiconductor Industry Growing?
Semiconductor industry sales turned south in late 2018, starting with memory chips. The downturn soon spread to other chip markets.
In 2018, global chip sales rose 13.3% to $467.1 billion, despite the market weakening late in the year, according to the Semiconductor Industry Association. Memory chips are the largest semiconductor category, representing about a third of total sales.
In 2019, the semiconductor industry suffered its worst year in almost two decades. Semiconductor revenue fell 12% to $412.1 billion, the SIA reported.
“Amid a confluence of factors, including ongoing global trade unrest and cyclicality in product pricing, worldwide sales of semiconductors were down considerably in 2019,” SIA Chief Executive John Neuffer said in a Feb. 3 news release.
The World Semiconductor Trade Statistics organization projects annual global chip sales will increase 5.9% in 2020 and 6.3% in 2021.
However, business interruptions from the Covid-19 coronavirus pandemic are threatening the nascent semiconductor industry recovery. First, the deadly disease halted production in China. Then, as it spread worldwide, the pandemic caused the global economy to hit the brakes.
Nvidia Among Semiconductor Companies With Upbeat Results
The fourth-quarter earnings season was largely positive for semiconductor companies.
Chipmakers offering upbeat results and guidance included Intel (INTC), Inphi (IPHI), Nvidia (NVDA) and SiTime (SITM).
During fourth-quarter earnings calls, executives with many publicly traded semiconductor companies reported improving demand. Areas seeing an uptick included smartphones, data centers and 5G wireless infrastructure.
The first-quarter earnings season for the industry kicks off on April 16 when Taiwan Semiconductor Manufacturing (TSM) releases its results. Wall Street analysts likely will focus on the impact of the Covid-19 pandemic and related macroeconomic issues.
Largest Semiconductor Companies
Chip stocks tend to rise ahead of an actual recovery as investors anticipate a turnaround.
IBD’s Electronics-Semiconductor Manufacturing group currently ranks No. 46 out of 197 industry groups.
The group includes 32 semiconductor companies. The largest chipmakers by market cap are Taiwan Semiconductor Manufacturing, Intel and Texas Instruments (TXN), in descending order.
IBD’s Electronics-Semiconductor Fabless group ranks No. 14.
The group includes 31 stocks, topped by Nvidia, Broadcom (AVGO), Qualcomm (QCOM) and Advanced Micro Devices (AMD).
IBD’s Electronics-Semiconductor Equipment group now ranks No. 36.
It includes 34 stocks, led by ASML Holding (ASML), Applied Materials (AMAT) and Lam Research (LRCX).
Why Are Semiconductors So Important?
Semiconductors are important to the world because they power technologies that enrich the lives of consumers and make businesses and other enterprises run smarter, faster and more efficiently.
They provide the ingredient technologies for personal computers, tablets, smartphones and other gadgets. Semiconductors run communications networks and the internet. They are adding smarts to televisions, home appliances, automobiles and other devices.
Semiconductor chips also underpin such massive emerging trends as cloud computing, 5G wireless networks and artificial intelligence.