The information technology sector has been the leading sector year-to-date in the S&P 500 with an average return rate of 24.42%. Within the information technology sector, both the semiconductor and semiconductor equipment industries have been driving this growth in returns with each industry attributing an average return rate of 26.19% and 37.07% respectively. This growth can be credited to the rise in global chip sales. According to the Semiconductor Industry Association global ship sales rose 13.7% to $468.8 billion in 2018. Despite the fact that the market started to weaken late last year, the 2018 figure represented the industry’s highest-ever annual total.
So, what is a semiconductor? Conductors as a whole conduct electricity, insulators help resist electricity and semiconductors fall in between the two. Their level of conductivity and other properties can be changed with the introduction of impurities, to meet the specific needs of the electrical components in which they are installed. Also known as semis, or chips, semiconductors can be found in thousands of electrical products such as computers, smartphones, appliances and even medical equipment. Their actual function includes the amplification of signals, switching, and energy conversion.
The semiconductor industry lives by a simple rule, smaller, faster and cheaper is always better. While some experts believe that Moore’s Law is no longer applicable, chips manufactured today are still increasingly growing smaller in size. It’s quite simple why being smaller is better in the semiconductor industry, finer lines mean more transistors can be packed on a single chip. The more transistors a single chip has, the faster that chip works. Due to the size of competition, and the rate at which new technology is currently developing, the price of a chip can fall up to 50% within months. With this constant pressure on chip makers to come up with something better and cheaper, it is easy to see why only a few companies achieve success in the semiconductor industry.
Semiconductors were invented in the United States, and the US still leads the world in manufacturing, design, and research. The US is currently the worldwide leader in this industry owning nearly half of the global market share. In 2018, the US semiconductor industry made a total $209 billion, with over 80% of US semiconductor company sales being to customers overseas. Semiconductor chips and equipment is also the US fourth largest export, after airplanes, refined oil and automobiles. This highly competitive industry is made up of four main product categories: memory, microprocessors, commodity integrated circuits, and complex SOC’s.
Semiconductor stocks are currently on the rise and many of the industry top players are expecting accelerating demand growth in the next coming months. The VanEck Vectors Semiconductors ETF, which holds 25 of the largest semiconductor companies, is up 28% year to date and trading near historical highs. This sector however has seen some resistance in the past several months. A lot of this resistance comes from the industry’s intrinsic supply and demand dynamics and the current uncertainty of the trade war. With that being said, many of the top players in this sector are seeing signs of a rebound in sales in the coming months.
Even though global semiconductor sales were off to a weak start this year with a broad- based year-over-year decline in January and February, it is expected to improve in the coming months. The rise in demand of cutting-edge technology, including cloud-based computing, autonomous vehicles, augmented reality and artificial intelligence, is one of the main drivers pushing for this expected growth in the industry. Also, the deployment of 5G technology is expected to further increase this growth and create further opportunities.
By Michael Betancur - TMT Analyst, Baruch IMG