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A Microchip Boom Is Underway – Here’s How to Play It

21 | By Michael A. Robinson

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.

21 Responses to A Microchip Boom Is Underway – Here’s How to Play It

  1. Marie Panos says:

    Hi Michael…..just a note to thank you for the wonderful in-depth reports on the many companies
    you investigate for your subscribers. As an older person with four grandsons, I am interested in leaving them one of your highly recommended choices that will “pay off” for them at a time down
    the road when they will truly appreciate it and remember how much I cherished each of them.

    Wishing you continued good health…..

    MPanos

  2. Anders Lindquist says:

    A while back you were very keen on AMBA but I’ve not heard you say much about of the stock lately, what gives?
    Best, A

  3. shoshana rotter says:

    I bought STM per your recommendations. Few cents up, few cents down. I don’t see a direction.

  4. Marian Zieg says:

    All those stocks went down today. Is someone manipulating the market? I know they are volatile. IS now while they are down a good time to buy?

  5. Merrill Gardner says:

    Yes I am very interested in investing in micro chip technology And would like to invest in it. But where do i start and with whom?
    MC Gardner

  6. don says:

    I rarely, if ever , see you mention calls and puts strategies on any of your suggestions.
    Wondering why?

    • William Patalon III says:

      Dear Don:

      Thanks for the post. Michael does use some of these strategies in some of his paid services — Nova-X and Radical Technology Profits. We present some great research and great strategies here in Strategic Tech Investor — which is remarkable, given that it’s totally free of charge. We often get requests like this — or similiar ones, such as readers asking us to run full portfolios, and to issue real-time sell alerts. And we do all those things in RTP and Nova-X.

      I usually tell those folks what I’m going to say here: It sounds like you’re a veteran investor, and are looking for some more-sophisticated, higher-return strategies. In other words, you appear to be seeking more of a “full-service” offering. And if it’s tech investing that interests you, I would suggest that you check out one of these other services.

      Again, just a suggestion. I’m an editorial guy, not a marketer … so I’m selling not selling here. But I do want our readers and subscribers to be satisfied with what we offer.

      Hope that clarifies things a bit for you.

      Respectfully;

      William Patalon III
      Executive Editor/Editorial Director
      Money Map Press LLC

  7. jerry ellis says:

    question–i agree that the microchip boom is underway–in the short term i can not invest in 7 different semiconductor companies–would you please prioritize which of thoese stocks have the greatest growth opportunity as a investment here in 2014 –thank you for this article and your thoughts–jerry ellis

    • William Patalon III says:

      Dear Jerry:

      Thanks for the comment. But I’m afraid you missed the point of this column. Michael isn’t recommending seven chip stocks … he’s recommending the semi ETF. What he was doing here was to give you a feel for what the fund holds … what it’s all about. That’s one of the things that sets Michael apart from so many of the other so-called tech investing “experts.” He really wants you to understand what you’re investing in. So many other folks just rec an ETF … but don’t tell you what it holds. Michael does that here.

      Hope that clarifies things a bit for you.

      Respectfully yours;

      William Patalon III
      Executive Editor/Editorial Director
      Money Map Press

  8. J. C. Reyes says:

    In investing, how many years do you consider “over the long haul!”? I’m — not much time left!

  9. David Losey San Antonio TX says:

    I believe that Edison was one of the Smartest Men ever to walk on the Planet.
    Regrettably, He was TOO Honest & ALL the Con Artists of his day were just as greedy as they are today. They wanted His Inventions & everything else.

    No Doubt, We could be enjoying hundreds more of items & technology were it not for the Greedy SOB,s but, Guess that’s the way the world is.

    Honesty, Integrity, Kindness and Dignity hasn’t changed over the centuries. In fact, It is getting worse.

    I appreciate those, including you, that share New Things, Concepts, Ideas etc.

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