If you follow the chip sector, you might be confused.
Check out what’s happened in just the past month…
On Nov. 3 we learned that Marvell Technology Group Ltd. (Nasdaq: MRVL) is in talks to buy Cavium Inc. (Nasdaq: CAVM). The pact would create a chip firm worth some $14 billion but the deal is yet to be consummated.
But that was small potatoes compared to what came next.
On Nov. 13, Qualcomm Inc. (Nasdaq: QCOM) rejected a $105 billion buyout offer from Broadcom Ltd. (Nasdaq: AVGO) – what would have been the biggest tech buyout in history. As a leading supplier of mobile-chip technology, Qualcomm says it’s better off operating on its own rather than merge with.
And all that comes after Qualcomm offered $39 billion to buy NXP Semiconductors NV (Nasdaq: NXPI). At the time, that was the record amount for a chip sector takeover.
Moreover, Wall Street analysts seem to be constantly putting the semiconductor sector on “watch” – saying the current chip surge is about to run out… today… tomorrow… next week.
But they’re always wrong.
If you’re not sure where you should be putting your money after mixed messages like that, I understand. Like I said, it gets confusing.
However, you do want some money in semiconductors.
See, the chip industry is consolidating not out of weakness, but strength.
A recent report by industry trade group SEMI forecasts that silicon shipments will hit 11.49 billion square inches this year, 11.8 billion next year, and 12.24 billion in 2019. Total shipments of “wafers” – the format silicon is produced in – for this year will break the record set back in 2016. And shipments will continue at record levels for each of the next two years.
And that’s just one robust forecast – I’ll show you a couple more below.
Still, if you’re not up for picking and choosing among the acquirers and acquireds, there is a way to make money off the on again/off again Qualcomm-Broadcom merger, the Marvell-Cavium lockup, and just about any other chip-sector M&A that comes along.
My Only Prediction Is Profits
Let’s be clear about one thing. Broadcom said it would like to proceed with the takeover even if that Qualcomm-NXP deal falls through – and even if Qualcomm keeps declining its advances. That means pulling off this merger will require more money. It’s a hurdle but not an impossibility.
That brings up a second challenge – federal regulatory concerns. The sheer size of the deal will likely lead to government officials taking a close look at it – and maybe even attempting to block it.
After the U.S. Department of Justice sued to block the $85.4 billion bid from AT&T Inc. (NYSE: T) for TimeWarner Inc. (NYSE: TWX) a couple of weeks back, it’s clear that the Trump administration is watching corporate consolidation closely.
At this point, that outcome is impossible to predict.
That’s where the iShares PHLX Semiconductor ETF (Nasdaq: SOXX) comes into play. Composed of 30 leading chip firms, SOXX is a cost-effective way to play both the sector’s long-term growth and its consolidation.
Dollars on Both Sides of the Deal
Broadcom itself is proof of the massive wealth creation that comes from strategic deal-making. It has acquired 51 chip forms in the past two decades to create one of the most powerful industry platforms in the business.
Plus, it’s no stranger to huge deals. Broadcom merged with Avago Technologies Inc. in 2016 in a $37 billion deal that opened up a ton of growth portals. Avago had been a smart buyer of leading tech firms itself, acquiring storied names such as LSI Corp., Agere Systems Inc. (itself a tech firm that came out of the original Bell Labs), Brocade Communication Systems Inc., and many more.
But there’s a lot more going on here that industry consolidation. As we often discuss here, chips play a vital role in just about every industry and underpin the Convergence Economy.
That’s the term I use to refer to the growing interrelationships between various sectors of the economy that are now completely dependent on high tech. We’ve passed the “tech tipping point” in which various technologies are overlapping and are enveloping the world around us.
Just consider the smartphone. Each one has a core processor, along with a raft of specialized chips that handle graphics, communications, sound, memory, and much more.
IHS Markit recently tore apart the iPhone 8 and found that it had $130 worth of chips packed into it. Even less advanced phones are home to $50 to $100 worth of chips.
The dollars in play grow pretty large when you consider that 1.47 billion smartphones were sold around the world last year, according to IDC.
Today’s cars and trucks have a growing array of chips that handle a range of safety, performance, and entertainment functions. In fact, vehicles’ chip content will double or more in value in the coming wave of driverless and even semiautonmous vehicles.
Consumer and industrial firms, meanwhile, now see chips as a central way to pack many more features into their products, giving them a clear edge against rivals that can’t keep up.
According to the Gartner Group, global chip sales rose 16.8% last year – and crossed the $400 billion threshold. SEMI says that figure should hit around $655.5 billion by 2025.
The World’s Best Chip Portfolio
With SOXX, chip mergers play right into our hands. Among its 30 holdings, the fund owns both Broadcom and Qualcomm. It also owns Cavium and Marvell Tech.
So it’s clearly set up to benefit from M&A – and its investors will book gains on both sides of any transaction. Plus, SOXX is a great way to invest in the chip industry’s big impact on the Convergence Economy.
SOXX’s top two holdings are Intel Corp. (Nasdaq: INTC), with a weight of 8.92%, and Qualcomm, with a weight of 8.86%. Other key holdings include…
- Nvidia Corp. (Nasdaq: NVDA), which took its strong leadership in chips for video gaming and has branched out into the hottest corners of the tech economy, is SOXX’s third-largest holding, with a weight of 8.27%. Nvidia’s chips are now playing major roles in Big Data, cloud computing, artificial intelligence, and the connected car. The firm boosted sales at a stunning 38% clip last year, and sales should grow at least 30% this year as well. Operating leverage means profits are growing in excess of 40% these days.
- Analog Devices Inc. (NYSE: ADI) – SOXX’s 10th-largest holding with a weight of 3.59% – plays a dominant role in analog chips, which help convert external sensor readings into digital signals. An early 2017 purchase of Linear Technology Corp. has helped cement this firm’s leading role in analog chips Industry leadership here has helped. And Linear is also providing a clear path to much higher profit margins, which underpins 50% profit growth this year.
- Micron Technology Inc. (NYSE: MU) – the sixth-largest holding, with a weight of 4.63% – has also come to see the virtues of industry dominance. The memory and data storage chip maker has made a string of purchases that hasn’t just expanded its sales base. The deals have also helped the firm reduce excess industry capacity, which has led to much greater pricing power. You can see the impact on the bottom line, which is on pace to grow 54% this year.
- Lam Research Corp. (Nasdaq: LRCX) – the eighth-largest holding, with a weight of 4.04% — is one of the world’s top chip equipment suppliers. Its multimillion-dollar machines help clients design and build today’s most advanced chips, which are vastly more complex than just a decade ago. Lam’s clients are spending more than ever to ensure they own Lam’s newest and most advanced gear, which is helping fuel a 30% spike in sales this year.
At the Heart of the Future
Semiconductors are now at the heart of the global economy. In almost every industry, plans call for rising chip content in the years ahead.
That makes SOXX a smart and profitable way to cover the semiconductor waterfront at a reasonable cost.
Plus it passes through all three of my ETF Profit Screens.
- The fund’s expense ratio is just 0.48%.
- It has a four-star rating from Morningstar.
- And semiconductors are definitely on an upward trend.
Shares recently traded for $178, and the ETF has $1.25 billion in net assets. Thus far in 2017, this ETF has outgunned the S&P 500 by around 40%.
With this investment, the chip sector will pay your handsome profits for years to come as the Convergence Economy pushes your tech wealthy steadily higher.
One more thing before I go…
You know D.R. Barton, Jr. from all the times I’ve told you about his new book – The 10-Minute Millionaire: The One Secret Anyone Can Use to Turn $2,500 Into $1 Million or More.
Or maybe you’ve read his reports over at Money Morning… or get his free The 10-Minute Millionaire e-letter.
But what you may not know is that over at D.R.’s Stealth Profits Trader premium service, he’s been on quite a roll.
D.R. has had 50 triples and counting in Stealth Profits, and he’s now turning up the heat in his The 10-Minute Millionaire Pro newsletter as well…
Not only did he just score his first triple on Limelight Networks, Inc. (Nasdaq: LLNW), but he also made a cool 100% on his very first options play for 10MM Pro (calls on Bank of America Corp.). From entry to triple, the BAC play took just five trading days.
I try to talk with our customer service folks here every few days, and they tell me D.R.’s customers are causing their phones to ring off the hook – in a good way.
For example, they tell me that Ray Jenkins is ecstatic: “I made a net total profit of $5,205.81 in six trading days from D.R.’s BAC $27 calls. That’s 158.5% made off my $3,284.46 initial investment!”
James Fieher adds that he made “$1,020 – 334%.”
D.R.’s still in BAC and is positioned for more upside.
If you’d like to join him, just click here.
Have a great weekend.
I’ll see you back here next week.