The semiconductor industry is looking up because of evolving end markets, new products, shrinking geometries and improving process yields.
The bulk of semiconductors still go into computers and consumer gadgetry, but they are increasingly being adopted in automotive, industrial and now, the Internet of Things (IoT). Driving this trend is the desire for light, beautiful and efficient mobile devices that can draw information they need from a large pool of data, which is now being referred to as the cloud.
In IoT, everyday gadgets get connected to the cloud to use/share information easier. Since semiconductors impart intelligence to these devices/things and are also the brains behind the high-compute high-storage capabilities of the cloud, the industry is a major beneficiary of these trends.
Also, as gadgets are getting smaller and everyday things increasingly connected, there is a growing need for energy efficient semiconductors at lower prices. Energy efficiency is enabled by the increased density of integrated circuits and more efficient chip architectures. But prices can be lowered only when the manufacturing cost is lowered. This is enabled by the efficiency of the manufacturing process, which is the reason for shrinking geometries (28nm, 20nm, 14nm and then 10nm).
The industry is far less cyclical than it used to be because significant losses in past cycles and economic crises leading to protracted periods of weak demand have made technology buyers more conservative. Since this basically means leaner inventories, the industry has turned focus to the efficiency of operations and more sophisticated tooling. Industry players are also in tighter relationships with their customers so they are able to better align their inventories with actual consumption.
Here are three great stocks that should enable you to participate in these trends:
Intel Corp (INTC - Analyst Report), with a Zacks Rank #1 (Strong Buy) is one of the companies best suited to benefit from these trends. The company is dominant in the server and desktop PC segments and announces new products at regular intervals that establish and maintain its lead. With the PC market stabilizing and servers remaining very strong, Intel is hard to beat in its core markets.
The company may have missed the mobile revolution, but it is currently on track to play catch up this year with purchase incentives and an agreement with China-based Rockchip. It has taken a lead in IoT, which is the next big thing, with significant R&D investment that is already translating to growth. As if all this were not enough, Intel is head and shoulders above the rest when it comes to process lead. It also has significant capacity that it is using to build strategic foundry partnerships.
NVIDIA Corp (NVDA - Analyst Report), also carrying a Zacks Rank #1, should benefit from the increased adoption of its Tegra K1 processor. Recently, the company reported that Google had selected the K1 to power its Project Tango tablet development kit, which is likely to help future adoption. Xiaomi, one of China’s largest mobile device manufacturers also used the Tegra K1 in one of its latest tablets.
The company also packs its graphics processing power (along with software) into a product called Tesla that is very popular as an accelerator in high performance computing (HPC) environments. Its arrangement with ARM Holding (ARMH - Snapshot Report) is potentially a threat to Intel’s progress in the segment.
NVIDIA also has an agreement with VMware (VMW - Snapshot Report) that should boost its position in desktop virtualization. But the reason for the earnings surprise of 47.06% in the last quarter was its high-end GPUs for traditional desktop and notebook markets. So the company is positioned to deliver on multiple fronts.
Texas Instruments (TXN - Analyst Report) with a Zacks Rank #2 (Buy) is also worth considering because the company has reorganized its business to focus on several high-margin, high-growth areas of the analog and embedded processing markets. This continues to strengthen its communications business while increasing its exposure to the industrial and automotive markets.
Electronic components in industrial and automotive markets have increased in recent times due to the drive for increased automation, infotainment and a growing demand for safety and security systems. TI’s strategy is a little different from the other two players, as the company is moving away from the high-growth more-volatile consumer/computing markets and focusing on areas that typically generate slower growth but steadier profits.