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Semiconductor Stock Outlook

Published 01/20/2015, 12:08 AM
Updated 07/09/2023, 06:31 AM

The Semiconductor Industry serves as a driver, enabler and indicator of technological progress. Developments in the industry determine the way we work, transport ourselves, communicate, entertain ourselves and respond to our environment. The PCs we work on, the cars we drive, the phones we communicate with, the electronic gadgets on which we watch movies, listen to music and play games on, and the planes and weapons used to transport or protect us use semiconductor devices.


As environmental issues have become more of a concern today, semiconductor devices are being made to reduce power consumption, reduce heat dissipation, capture solar energy, create more efficient lighting solutions and so forth.

Current Drivers

Considering the broad application of semiconductor devices, end markets have a significant impact on the industry:

Very significant among these is the emerging Internet of Things (IoT) market, which has grown on the back of cloud storage and the growing interconnectedness of things. IDC estimates that the market will grow at a 7.9% CAGR from 2013 to 2020. Prime beneficiaries in the semiconductor industry are likely to be Intel Corp, ARM Holdings and STMicroelectronics .

The most important traditional markets that have been converging to a certain extent over the past few years are computing and consumer. Of these, PC and notebook growth has been contained by the advent of tablets, but this is less of a factor in developed markets today. So upgrades in these markets will lead to some growth, offsetting the tablet pressure in developing markets and boosting semiconductor sales.

Intel is the prime beneficiary here, although others will benefit to varying degrees. Intel is also the prime beneficiary of the strength on the cloud/data center/storage/networking side, but ARM and Advanced Micro Devices Inc (NASDAQ:AMD) are expected to find niches.

Important drivers here include the need for denser, lower-cost and more secure data centers and networks, and more intelligent network control, leading to the growth of software defined networking (SDN). Spending on smart grids and intelligent metering applications is expected to see particularly strong growth (19% CAGR through 2016 according to IC Insights).

Tablets, phones and other mobile devices primarily run on ARM designs that are licensed by companies like Broadcom (NASDAQ:BRCM), Advanced Micro Devices Inc (NASDAQ:AMD), Apple Inc (NASDAQ:AAPL) and Samsung(LONDON:0593xq) to make semiconductor devices. But consumer also includes many other items, such as 3D printers, health and fitness devices, smart watches, Ultra HD television displays and smart thermostats that will see the strongest growth this year (108%), albeit off a small base (CEA estimates).

Smartphone revenue (the single largest driver of CE sales) will grow 5% while tablets will see a 1% decline. But both smartphones and tablet units will grow, meaning greater chip consumption.

Wireless infrastructure builds (3G, 4G LTE) are driving the communications market. Increasing data volumes and connectivity issues (network congestion, power reliability, privacy and security) drive semiconductor sales.

Another market with good prospects is automotive, where safety, infotainment, navigation and fuel efficiency requirements continue to drive demand for semiconductors. Growth in industrial applications is related to automation in the manufacturing process and largely tied to GDP growth, so this is less of a driver today.

Medical is something of a niche market, so it has a limited impact on overall semiconductor sales. The previous cycle had many players diversifying into these slower-growing but less volatile markets. This has resulted in a large number of slower-growing players within the industry that generally continue to generate decent cash flows.
Other secular growth markets include aerospace and defense that are, however, dependent on government decisions and policies.

The need to lower costs and generate stable profit margins led many device makers to focus on the development of designs while outsourcing fabrication to Asian players. Intel (NASDAQ:INTC) and Texas Instruments Incorporated (NASDAQ:TXN) are the most notable exceptions and were later followed by Globalfoundries, which was formed out of AMD’s manufacturing operations.

This led to the growth of major Asian foundries like Taiwan Semiconductor Manufacturing (NYSE:TSM), United Microelectronics (NYSE:UMC) and Semiconductor Manufacturing (NYSE:SMI) as well as a large number of companies involved in backend operations like packing and assembly. IC Insights estimates that the pure-play foundries grew 16% in 2013 and will grow another 14% in to generate $41.2 billion.

Semiconductor manufacturing is a complex process and requires specialized machinery. So equipment makers comprise an important segment where revenues will grow 23.2% in 2014 according to SEMI. Gartner estimates that Applied Materials Inc (NASDAQ:AMAT), ASML Holding (NASDAQ:ASML), Lam Research (NASDAQ:LRCX), Tokyo Electron and KLA-Tencor (NASDAQ:KLAC) remain the top foundries with Intel, Taiwan Semiconductor and Samsung being the top spenders on equipment over the next few years.

Component Forecast

IC Insights estimates that a modest recovery in the PC market will help drive a 3% increase in microprocessor sales for PC/server embedded markets in 2014 after two years of decline. On the other hand, cell phone application processors will grow 19% with total microprocessor sales growing 9%.

DRAM supply is likely to be short of demand this year because of its application in mobile devices like tablets and smartphones on the one hand and the limited investment in manufacturing facilities on the other. This is expected to strengthen prices.

NAND demand is expected to remain very strong again in 2014, but considering the fire at Hynix that diverted some capacity to DRAM, there could be some supply constraints despite the fact that NAND manufacturers are adding capacity as well. So prices may be expected to remain strong. SSD demand will also spike, as will its supply.

iSuppli expects growth in the standard logic market, and considering the slight recovery in the PC market (which uses the most standard logic), this may be correct. Stronger automotive and industrial sales, which while much smaller than the PC market will also continue to push consumption of standard logic components.

Earnings reports and outlooks from leading companies indicate that the market remains strong overall with limited chances of channel stuffing.


Gartner says that memory will be the strongest driver through 2018 driven by SSD adoption at the data center and favorable DRAM pricing for now. Logic (driven by smartphone and ultramobile demand, and FinFET transition over the next few years) will be the second largest driver.

According to World Semiconductor Trade Statistics (WSTS), there should be positive worldwide semiconductor sales growth of 6.5% in 2014 (previous 4.1%), followed by 3.3% growth in 2015 (previous 3.4%). Asia, Europe, the Americas and Japan will grow 9.3%, 7.9%, 2.1% and -1.3%, respectively.

The semiconductor industry is made up of 11 sub-sectors within the Technology sector, which is one of the 16 broad Zacks sectors. The following table seeks to explain the position of companies in the semiconductor market in the context of the Zacks Industry Rank.

Semiconductor Market

We rank the 264 industries across the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

The outlook for industries positioned #88 or lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

As indicated in the table above, the first 5 semiconductor segments are positive, the next 4 are neutral, while the rest are negative.

The average rank of stocks in each sub-sector is indicated in the last column [Note: Zacks Rank #1 for individual stocks denotes Strong Buy, #2 is Buy, #3 means Hold, #4 Sell and #5 Strong Sell].

Earnings Trends

The broader Technology sector, of which Semiconductors constitute a part has just started reporting Q4 results. While the revenue beat ratio of 42.9% was just short of the S&P 500 average of 44.4%, the earnings beat ratio of 71.4% bettered the 69.4% average for the industry. It is too early to tell a trend at this stage, but financial discipline and generally strong demand are the likely reasons for the positive comparison.

Total earnings for the sector were up 18.5% year over year (5.6% in Q3). Total revenues were up 6.4% from last year (6.9% in the Q3).

Technology sector earnings are expected to be up 8.5% in 2014 and 12.3% in 2015. Revenues are expected to grow 6.6% and 5.8%, respectively.

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