The semiconductor industry is an important one, in fact, if it weren’t for semiconductors then you wouldn’t even be able to read this. So what exactly is a semiconductor, and why should you care about them? A semiconductor, in a nutshell, is a materials product usually made of silicon, which conducts electricity more than an insulator but less than a pure conductor, such as aluminum or copper. Semiconductors are usually very small complex devices, and the industry is driven by who can become smallest and more complex at the fastest rate. Modern day semiconductors are very small and can be found in just about every electronic device you use from your smartphone to your washing machine.
Ever since their creation, semiconductors have continuously become smaller and more powerful. An important observation pertaining to semiconductors was noticed by Intel co-founder Gordon Moore in 1965, which today is known as Moore’s law. Gordon Moore noticed that the number of transistors per square inch on integrated circuits had doubled every year since their invention, and he predicted that the trend would continue into the future. While he was right for many years, the pace has slowed, the number of transistors per square inch has doubled approximately every 1 year and 6 months. While the pace has slowed down for Moore’s law, the interest in the semiconductor industry has done just the opposite as the IoT or “internet of things” has continued to grow. Let’s look at how the semiconductor industry has performed in the past, and also how it has performed in more recent years.
When I screen for just semiconductor stocks, I am immediately given 104 results, and you can see more about these companies below in the “results breakdown” tab. You can clearly see that small cap stocks make up the majority of this industry, because there is a lot of room for specialization. It is also important to note the PE ratios for this industry are very good for the most part. The performance of the semiconductor industry is very much dependent on the performance of companies who are selling products with their semiconductor chips in them, such as laptops, iPhones, and other various electronics.
To show the correlation between semiconductors and their sales, I’m going to use two very hot stocks, Nvidia & Tesla. These are both stocks that short sellers have learned to hate because they have continuously defied the odds over and over again. Both Tesla’s model S and model X are powered by Nvidia’s NVIDIA DRIVE PX2, a system that uses groundbreaking approaches in deep learning to perceive and understand the car’s surroundings. Since this is a vital part of the Tesla automobiles, you can see the correlation between the two stocks.
When you look at the history of the semiconductor industry, you notice that it has been a very bumpy ride, especially around the tech bubble. Something important to note is that the semiconductor industry is trading at levels identical to those of the peak of the tech bubble, so you could make the argument that the speculation was right in 2001, just 16 years too early. But like I said before, the semiconductor industry is very dependent upon the overall health of the economy, which makes the semiconductor business very cyclical–it very much follows the boom-bust cycle.
When we look at the semiconductor industry in more recent times, you see that it failed to outperform the S&P 500 until mid-August of 2016. Once the semiconductors began to outperform, they kept up at a very stable rate due to increased healthy economic data paired consumer confidence near an all time high so many people were buying electronics.
Instead of the sector as a whole, let’s do some additional screening and see how the larger, better-performing companies have faired in recent times. I added two additional parameters to the screener to look for companies with market caps greater than two billion dollars, and companies with a P/E ratio greater than 15. The results are much better than the industry as a whole, showing a 64 percent increase as opposed to 40. I don’t see this performance slowing down anytime soon.
Tech and more specifically Semiconductors may see a pull back as more capital is allocated towards the banks after passing their stress tests, but there is a lot of room for the larger cap semiconductor stocks to run as the digital age of technology becomes incorporated into more areas. The cryptocurrency race between Bitcoin and Ethereum has benefitted both Advanced Micro Devices (AMD) and Nvidia (NVDA), as their GPUs are high demand products to efficiently mine these two cryptocurrencies. Also, as I said before, technology is being incorporated into to more areas of everyday life from wearable technology to fully autonomous self-driving cars. If the United States economy keeps growing at the current rate and if all the economic data stays positive, then the semiconductor industry will continue to climb higher.