Not Your Father’s Semi Industry

In the past 10 years, the fundamental shift in the semiconductor industry from corporate IT to consumer demand is very important to consider when looking at the industry. This has created a different playing field. There are more products that use Semi Components (MP3, cellphone, automobile, "smart" houses). The potential exists for more commoditized products and ASP erosion.

Firms that will out-perform in a slightly negative GDP environment include:

• Firms with the strongest balance sheets, such as Intel ([url=http://www.zacks.com/research/report.php?t=intc]INTC[/url])
• Companies that make specialized semiconductors (for example, chips used in dentist X-rays)
• Firms that sell products that are technology-driven rather than capacity-driven
• Companies that are gaining market share because of superior technology, like Varian Semiconductor ([url=http://www.zacks.com/research/report.php?t=vsea]VSEA[/url])
• Firms that sell products associated with regulations such as power conservation, like Power Integrations ([url=http://www.zacks.com/research/report.php?t=powi]POWI[/url])

OPPORTUNITIES

Older technologies deliver power inefficiently, often consuming two or three times the amount of power needed by the end product, and wasting substantial amounts of energy. Firms that provide solutions to so-called "energy vampires" will outperform. Our favorite name in this arena is Power Integrations, Inc. ([url=http://www.zacks.com/research/report.php?t=powi]POWI[/url]).

Solar Power has seen double digit growth every year since 2004. Check out MEMC Electronic Materials, Inc. ([url=http://www.zacks.com/research/report.php?t=wfr]WFR[/url]).

Generically, the licensing business model has inherent advantages such as a low overhead structure, limited capital investment requirements, very high margins and strong cash flows. On the flip side, this requires the maintenance of a technologically advanced IP portfolio and its protection from infringement, which could be very complex in a global economy with countries that don’t recognize or actively enforce IP rights. Investors may want to consider Tessera Technologies, Inc. ([url=http://www.zacks.com/research/report.php?t=tsra]TSRA[/url]).

WEAKNESSES

Here is a situation to avoid: that of Hubbell, Inc. ([url=http://www.zacks.com/research/report.php?t=hub.b]HUB.B[/url]). Its share price dropped sharply in September, but has stabilized since. We tend to think that there could be further downside, given the recessionary macro economic trends and the positive correlation between Hubbell’s growth and the growth of the national GDP. Additionally, both residential and non-residential construction activity appears to be slowing and could worsen in 2009.