While some folks are worried that the big drop in PC sales would send the semiconductor business into a nosedive, it’s actually one of the hottest markets around the world today.
Sales of microchips are at multi-year highs, driven by major new trends that are reshaping the global tech landscape – including Big Data, The Mobile Wave, Cloud Computing and Sensors – all of the things I’ve been telling you about here at Strategic Tech Investor each week.
Semiconductors are also essential to the operation of smartphones, tablets, satellites, TVs, even wearable technology – one of the industry’s biggest new breakthroughs.
All of which make semiconductors one of the best places to invest your money.
And today I’m going to show you a unique way to play the industry’s surge for big gains – even while armoring yourself against the sector’s notorious volatility.
A Microchip Boom Is Underway
Semiconductors are a foundational element of the global high-tech economy.
They’re the “brains” of your PC, smartphone and iPad. And they’ve become increasingly integral to everything electronic.
In fact, according to the Semiconductor Industry Association (SIA), worldwide chip sales reached $26.28 billion in January.
Not only did that represent an 8.8% annual increase, it was the biggest gain in nearly three years.
Independent analysts are expecting yet another good year for the sector.
For instance, Research and Markets forecast an additional 4.4% increase in worldwide sales of semis for 2014.
And I have unwavering belief you will continue to see torrid growth in this sector for years to come.
Here are three big reasons why:
First, of course, there’s the impact of the Mobile Wave. Research firm Gartner believes that this year mobile products – including smartphones and tablets – will outsell PCs by a factor of $2.25 billion to $302 million – a whopping 745% margin. And all of these mobile devices are loaded with chips.
Then there’s the auto sector. The “connected cars” of today are brimming with advanced sensors, micro-controllers, software, voice-activated GPS, glitzy infotainment systems – and, of course, plenty of semiconductors.
Demand for microchips in the global auto industry is projected to grow from $22.5 billion in 2010 to $46.9 billion in 2015 – meaning it will double in just five years.
And, finally, let’s not forget the powerful new kid on the block: Wearable Tech. We’re still in the very early stages of this field, which includes things like smart watches and devices that monitor your health.
But the online trade journal Electronics360 says wearables have already become a $7 billion industry.
And forecasters at IHS are predicting that wearables will become a $30 billion sector a decade from now.
No wonder one of the biggest barometers of the chip sector, the Philadelphia Semiconductor Index, recently climbed to the 590 level – its highest point in nearly a dozen years.
Of course, semiconductor stocks as a group can be volatile.
Chip makers have to tool up for new products, a process that can take many months and consume hundreds of millions of dollars. So, if they miss a product launch even slightly, the firms can find their stocks hammered.
That’s why to get some action in this hot sector – while still protecting yourself against its occasional unpredictability – I think you should take a look at SPDR S&P Semiconductor ETF (NYSE:XSD).
Holding some four dozen stocks, it’s an exchange-traded fund (ETF) that touches a wide swath of the semiconductor industry.
Of course, XSD has its share of well-known mega-cap firms, like Texas Instruments Inc (NasdaqGS: TXN). The 80-year-old company counts roughly 90,000 businesses around the world as customers.
It’s involved in everything from driver-assisted systems for the auto industry to factory automation to smartphones and tablets. Trading at $47 a share, TXN has a $51 billion market cap and operating margins of 24%.
Then there’s Silicon Valley pioneer Intel Corp. (NasdaqGS: INTC), an outfit synonymous with semiconductor miniaturization. This is a company that easily spends $10 billion a year on research and development.
Intel is a key supplier to Apple Inc. (NasdaqGS:INTC), providing the microprocessors that drive the Macbook and Mac Pro personal computers. Trading at $26 a share, it has a $129 billion market cap with 24% operating margins.
At the same time, XSD holds a wide range of smaller firms on the cutting edge of technology including:
- First Solar Inc (NasdaqGS: FSLR). The largest American maker of solar panels. The Arizona-based company is currently vying for 15 commercial projects in the U.S. and regions like India and South America and is targeting 36% sales growth. Trading at $71 a share, it has a market cap of $7.17 billion, operating margins of 14% and a 9% return on stockholders equity.
- Rambus Inc. (NasdaqGS: RMBS), a Silicon Valley firm developing nextgen chips for smartphones and tablets. It also makes semis for security and lighting systems. Currently trading at $11.30 a share, Rambus has a market cap of $1.3 billion, operating margins of 15% but a weak return on stockholders equity of minus 10%.
- Micron Technology Inc. (NasdaqGS:MU). The company is a global power in the key technology of computer memory. It has a new breakout product known as the Hybrid Memory Cube that runs 15 times faster, uses 70% less energy and takes up 90% less space than other memory systems. Trading at $24.50, Micron has a $26 billion market cap, 11% operating margins and a 20% return on stockholders equity.
- Skyworks Solutions Inc. (NasdaqGS:SWKS). With this stock, XSD is also investing in a number of end markets, covering everything from defense to medical to wireless and automotive. Trading at $37.50, Skyworks has a $7 billion market cap with operating margins of 20% and a return on stockholders equity of nearly 15%.
- Freescale Semiconductor Ltd (NYSE:FSL). Based in Austin, TX, the company specializes in embedded solutions that combine processors, semiconductor devices and software. It also makes sensors. Freescale recently came out with a chip people can swallow and can be used for healthcare monitoring. Trading at $25, Freescale has a $6.5 billion market cap. It has 14% operating margins but had net losses in last year’s fourth quarter and did not list its stockholder’s equity.
All of these firms are involved in some pretty impressive technology.
Thus, XSD offers both the upside that comes with the semiconductor boom and the stability that stems from owning a well-run ETF.
Trading at $70, XSD allows you to touch virtually the entire world’s tech ecosystem in a very a cost-effective manner. Over the past year, XSD has gained 44%, or more than twice the S&P 500’s profits of 20% in the same period.
This is one of those great foundational plays I like to tell you about. The idea is to have this kind of solid base in your portfolio so you can steadily improve your net worth over the long haul.
To me, it’s exactly the type of strategic play that every tech investor ought to make.