With apologies to Mark Twain, reports of the chip sector’s demise were greatly exaggerated.
See, last winter, several leading chip stocks faced downgrades as Wall Street hit freak-out mode.
The thinking at the time was that a global recession and a supply chain strained by the pandemic would put a big crimp in semiconductors sales.
Now it can be told. The exact opposite turned out to be true.
As I have noted here several times, the global chip industry is booming.
Turns out the pandemic caused a surge in demand for tech across the board. And that puts chips at the center of everything.
A key industry report recently raised 2021 forecasts for the $433 billion sector. Semis are now supposed to rise 8.4% next year, nearly 65% more than last year.
Today, I want to show you a great backend play on the entire sector with a company that has beat the broad market by 71.6%…
No Chips, No Cars
Now then, recent data shows pretty clearly that COVID did not cause chip sales to decline.
Indeed, just the opposite occurred…
According to the Semiconductor Industry Association (SIA), worldwide sales of semiconductors reached $36.9 for the month of November 2020, the last month for full data.
That’s a full 7% higher than in October 2019. Still, even those numbers understate what’s happening here at home.
In the Americas, semiconductor sales jumped by a whopping 12.5% year over year following a 14% increase in October.
To understand why, start by taking a look at today’s autonomous cars.
They rely on chips to process information.
In fact, any recent car is now a driving computer, with chips controlling the engine, fuel system, and steering.
Not to mention all the driver-assist and automation features such as lane-departure warnings, blind-spot detectors, back-up cameras, automatic brakes, and so on.
All this requires real-time processing of data from multiple sensors across the vehicle.
No wonder the U.S. International Trade Commission says automotive semiconductors are the fastest-growing growing sector of the chip market.
This segment is estimated to grow at an average of 12.5% a year through next year at least.
Semiconductors Are the Economy
There’s more going on here than just a fast growth rate. See, car manufacturers have higher requirements for the longevity and reliability of the parts they buy compared to most other consumer industries.
So once a company manages to seal a semiconductor deal with a car manufacturer, chances are that deal will last a lot longer than for, say, supplying chips to the latest iPhone.
Semiconductors also are getting a big lift from the explosion of data shuttled across the Internet in 2020.
All at once, millions of people began working from home. Videoconferencing use skyrocketed, and everything work-related had to be sent over the Internet
Facebook Messenger, Whatsapp, and Instagram reported a doubling of voice calls and a 50% jump in text messages, while Cisco Systems Inc.’s (CSCO) Webex videoconferencing software saw traffic exceed its previous peaks by 24 times.
Not to mention that with movie theaters and entertainment venues closed due to COVID, video streaming has boomed. That too sent Internet traffic through the roof.
The exchange nodes where multiple networks connect reported that the total volume of data passing through jumped by up to 60% between December 2019 and March 2020.
We also have the 5G wireless upgrade cycle coming on strong this year that will affect at least 1 billion smartphones. 5G devices need 30% more chips in them than previous versions.
It shows the value in being able to throw out old ways of doing things as soon as it becomes clear that they are no longer working, and adopting the new and innovative methods that the times call for.
The same strategy can be applied any time you try to make money. There are 1,600 new millionaires in America every day, and working smarter, not harder, is the best way to get there.
Serial entrepreneur Abe Wagner can show you how you can work smarter instead of harder too. Just click here to save a spot for his summit on Thursday, January 21, 1:00 p.m. E.T.
You’ll also be subscribed to his free newsletter, Think Rich or Die Broke.
The Material Facts
Enter Applied Materials Inc. (AMAT), the world’s leading maker of the equipment needed to manufacture semiconductor chips.
Operating all over the world, Applied Materials supplies pretty much every semiconductor manufacturer, whether they make smartphone processors, LCD displays, memory chips, or sensors.
In addition to the highly precise hardware needed to create minuscule semiconductor chips, Applied Materials also helps companies set up the equipment, service it, and run it.
In fact, the firm is one of the leading makers of semiconductor equipment software, too. In short, Applied Materials does all the heavy lifting for its chip-making clients, letting them get to the business of creating state-of-the-art semiconductors.
Now, after a slight downturn in share price due to a lull in the semiconductor memory market, Applied Materials’ turnaround is taking hold.
Even Wall Street is taking notice. Analyst Quinn Bolton from Needham just raised his Applied Materials price target from $82 to $110 and called it his “top pick” in the semiconductor market.
See, the weak semiconductor memory market is a very small part of Applied Materials’ business. That lets the company profit from the surge in other semiconductors without being dragged down.
In fact, Bolton thinks Applied Materials will see a 10% growth in semiconductor systems revenue this year.
This is already paying off with the bottom line. In the most recent quarter, Applied Materials’ earnings jumped 56%. Meanwhile, the stock has been on a tear.
Since the market bounced back last March 23 to the end of 2020, the S&P 500 gained 67%. But Applied Materials surged 115%, beating the benchmark by 71.6%.
I still see lots of upside ahead.
If earnings grow at just half the recent rate, we’re going to see a double in just over three years.
Just as it does for its chip clients, Applied Materials can do a lot of the heavy lifting for your portfolio of market-crushing tech winners.
Cheers and good investing,
Michael A. Robinson