The Next Big Bet – Semicon Cycle

A long time investment adage holds that ‘as goes Intel, so goes the rest of semiconductor industry’.

Given that microchips are present in virtually every type of product, an uptick in semiconductor sector business activity today will represent a jump in broader economic growth tomorrow.
High proprietary chip content stocks are poised for breakout sales and earnings, probably quickly returning to levels before last summer’s plunge, according to an article in Forbes colum earlier this summer.

Semiconductor players are ramping up production to meet what they believe is a growing consumer demand. While it has yet to traverse the economic neutral zone to break into positive territory but at least the hemorrhaging is subsiding.

Inventories from many chipmakers are at a lower level compared to their average level for the past three years. Intel recently boosted its Q3 earnings revenue outlook by $500mn. The increase in Intel’s sales forecast could be attributed to a rebound in PC orders by consumers in Asia.

Dell, which until traditionally only sold its computers on-line and via telephone orders, continues to expand its retail presence from 30,000 stores last quarter to 43,000 so far. Demand for a lot of consumer devices like cell phones, e-books and mobile Internet devices seems to be picking up from six months ago, particularly non US.

Chip-making firms invest in new gear to expand the capacity to move to the newest technology or both. The financial crisis has kept players to minimal and several of the equipment players have filed for bankruptcy as a result. United Microelectronics Corp announced it is boosting its outlays for new equipment, Chartered Semiconductor will increase capex to $500mn from the 400mn announced earlier this year. The weak US dollar will also help in making American products cheaper in foreign currency terms.

Users are likely tot take advantage of technology improvements like Window 7 and Microsoft’s Office 2010, predicated on improving economy and related improvements in customer profits and government tax receipts.