Semiconductors, where they’re going and where they’ve been

The semiconductor industry is an important one. In fact, if it weren’t for semiconductors, you wouldn’t even be able to read this. So, what exactly is a semiconductor, and why should you care about them?

What is a semiconductor? A material product usually made of silicon, which conducts electricity. It is more powerful than an insulator but less than a pure conductor, such as aluminum or copper. Semiconductors are typically small, complex devices.

The tech industry is racing to see who becomes the smallest and most complex at the fastest rate. Modern-day semiconductors are found in almost every electronic device you use, from smartphones to washing machines.

The Development of Semiconductors

Ever since their creation, semiconductors have continuously become smaller and more powerful. Intel co-founder Gordon Moore made an important observation about semiconductors in 1965, known today as Moore’s law. Gordon Moore noticed that the number of transistors per square inch on integrated circuits had doubled yearly since their invention. He predicted that the trend would continue into the future. While he was right for many years, the pace slowed while the number of transistors per square inch has doubled approximately every 1 year and 6 months. While the pace slowed for Moore’s law, the interest in the semiconductor industry did the opposite, as the “internet of things” continued growing.

Let’s look at how the semiconductor industry has performed in recent and past years.

Screening for Semiconductors

When I screen only for semiconductor stocks, I am immediately given 104 results. You can see more about these companies in the “results breakdown” tab below. You can clearly see that small-cap stocks make up most of this industry because there is much room for specialization. It is also important to note the PE ratios for this industry are perfect for the most part. The performance of the semiconductor industry is dependent on the performance of companies selling those products. The products that make up these chips are endlessly necessary today, such as laptops, iPhones, and other electronics.

I will use two scorching stocks, Nvidia & Tesla, to show the correlation between semiconductors and their sales. These are both stocks that short sellers have learned to hate because they have continuously defied the odds repeatedly. 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.

Semiconductor History

The history of semiconductors has been a bumpy ride, especially in the tech bubble. Something important to note, the semiconductor industry is trading at levels identical to the peak of the tech bubble. Technically, you could argue that the speculation was right in 2001, just 16 years too early. But as I said, the semiconductor industry is dependent upon the economy’s overall health. If the economy is healthy, then it can make the semiconductor business cyclical–it must follow the boom-bust cycle.

Looking at the semiconductor industry more recently, 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 and 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.

Takeaways

Tech and, more specifically, Semiconductors may see a pullback as more capital is allocated to the banks after passing their stress tests. Still, there is much 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 Advanced Micro Devices (AMD) and Nvidia (NVDA), as their GPUs are high-demand products to mine these two cryptocurrencies efficiently. Also, as I said before, technology is being incorporated into 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.