The Semiconductor Industry serves as a driver, enabler and
indicator of technological progress. Developments in the industry
determine the way we work, transport ourselves, communicate,
entertain ourselves and respond to our environment. The PCs we work
on, the cars we drive, the phones we communicate with, the
electronic gadgets on which we watch movies, listen to music and
play games, and the planes and weapons used to transport or protect
us use semiconductor devices.
As environmental issues have become more of a concern today,
semiconductor devices are being made to reduce power consumption,
reduce heat dissipation, capture solar energy, create more
efficient lighting solutions and so forth.
The past decade has seen big changes in the industry, with most
players streamlining operations and transferring more routine
production to low-cost locations. This led to the development of
the Asian market, where most memory production and backend
operations have shifted.
However, since innovation remains largely within the country, the
sector is one of the biggest employers of labor, with a
corresponding significant impact on the overall economy.
Semiconductors and the Internet of Things
As one of the leading enablers of technological progress,
semiconductors are expected to play a key role in the growing
interconnectedness of things. Two factors have driven this change.
The first is the advent of the cloud that has made it feasible to
store very large amounts of data to be transmitted to and received
on wired or wireless devices. The second is the continued reduction
in the cost of manufacturing semiconductors that makes it feasible
to install them on a range of everyday devices that were previously
In its Internet of Things (IoT) 2013 to 2020 Market Analysis
report, IDC estimates that spending on IoT technology and services
will touch $8.9 trillion by 2020, or a 7.9% CAGR. IDC's estimates
continue to rise, given the growing enthusiasm for IoT and its
growing prospects. This should generate demand for billions of
) has promised to become a leading supplier of components and
services for IoT and leading European producers, such as
), Infineon and
) have asked the European Commission to set up research centers
dedicated to IoT. Many other players will undoubtedly join the
The consumer and computing markets remain the most important
traditional markets, but because of the gradual convergence of
functionalities, it is growing increasingly difficult to identify
which devices are computing and with which consumer. Semiconductors
are spurring this change, facilitating the convergence.
PC market growth will be moderate in the next few years, more than
made up by growth in mobile devices. A lot of the growth in the
next few years will come from price-sensitive emerging markets,
which is an added negative. Innovation in the mobile segment will
be focused on improving functionality and experience by getting
semiconductors to operate at higher speeds and by consuming less
ARM is a significant beneficiary of the trend favoring mobile
computing, since its simpler processor architecture consumes less
power. As a result, companies like
) and others have based their products on ARM cores. Intel appears
to have fallen behind in the race, but 2014 could see a reversal in
At the same time, dumber terminals mean increasing demand for cloud
services, which is pushing demand for servers and data centers and
thereby helping Intel, which is the dominant player in the segment.
While ARM is likely to enter this turf just like Intel is entering
mobile, Intel remains very strongly positioned here.
Other than tablets, the consumer electronics market also includes
gadgets like LCD TVs, Blu-ray players and smartphones.
The Consumer Electronics Association ("CEA") expects U.S. consumer
electronics sales to be up 2.4% this year, following a sharp
drop-off in 2013. The CEA expects global spending on technology to
decline 1% this year to $1.06 trillion.
However, spending on tablets and smartphones is expected to remain
strong at roughly 43% of all tech spending. Smartphone prices will
take a tumble however. The new category of smartwatches will do
around 1.5 million units. HD TVs, while remaining a very small
percentage of total TV units, will grow from 60K units to 485K
The wireless infrastructure segment of the communications market
has been stronger than the wireline segment in the last few years.
This segment is expected to remain consistent with 2013 levels, as
transition to 3G and 4G infrastructure continues. Increasing data
volumes across the world and infrastructure build-outs to support
these volumes and deal with connectivity issues (network
congestion, power reliability, privacy and security) will continue
to drive semiconductor sales.
In addition, enterprise and data center networks are undergoing a
huge change because of greater demand for data storage, security
and privacy (cloud computing, IoT). This should generate
significant demand for semiconductors over the next few years.
New concepts like software defined networking (SDN) are based on
more intelligent network control and are therefore new markets for
semiconductors. Spending on smart grids and intelligent metering
applications is expected to see particularly strong growth (19%
CAGR through 2016 according to IC Insights).
The automotive end-market has been growing in importance, as the
consumption of electronic components for safety, infotainment,
navigation and fuel efficiency continues to increase. As a result,
semiconductors serving this market should grow stronger than the
industry over the next few years.
Industrial consumption of semiconductors is linked to GDP growth,
which according to the UN economic growth forecast for 2014 is not
too exciting. The GDPs of the U.S., Western Europe and Japan are
expected to grow 2.5%, 1.5% and 1.5%, respectively.
Emerging economies like Brazil, Russia, India, China and Africa
are expected to grow 3%, 2.9%, 5%, 7.5% and 4.7%, respectively.
Medical Devices (normally included in this segment), lighting
solutions and residential construction markets are likely to be
stronger. As a result, semiconductor devices that have enabled
increased automation and efficiencies are likely to see modest
The aerospace and defense markets are considerably dependent on
government spending and policy making. The commercial aerospace
market (which lags an economic downturn or recovery) is looking up.
Production increases should be slightly positive for the
semiconductor industry this year.
Defense spending remains uncertain, although electronic weaponry,
intelligence systems and basic weaponry remain important. So
semiconductor manufacturers serving this market likely continue to
see mixed results, depending on the customers served.
The most significant trends for 2014 include the stabilization in
the PC market, continued strong adoption of tablets and smartphones
and the emergence of the new category of wearable devices. The
strength in these markets and continued innovation within them
should lead to strengthening demand for semiconductors through the
year. Additionally, channel inventories remain lean overall, which
means that strengthening demand will drive sales.
IC Insights estimates that a modest recovery in the PC market will
help drive a 3% increase in microprocessor sales for PC/server
embedded markets in 2014 after two years of decline. On the other
hand, cell phone application processors will grow 19% this year
with total microprocessor sales growing 9%.
DRAM supply is likely to be short of demand this year because of
its application in mobile devices like tablets and smartphones on
the one hand and the limited investment in manufacturing facilities
on the other. This is expected to strengthen prices significantly.
NAND demand is expected to remain very strong again this year, but
considering the fire at Hynix that diverted some capacity to DRAM,
there could be some supply constraints. But NAND manufacturers are
gearing up for the second half of the year when there should be
some additional capacity as well. So prices may be expected to
remain strong this year. SSD demand will also spike, as will its
iSuppli expects the standard logic market to start growing this
year and considering the slight recovery in the PC market (which
uses the most standard logic), this may be correct. Stronger
automotive and industrial sales, which while being much smaller
than the PC market, will also continue to push consumption of
standard logic components.
Forecast for 2014
According to World Semiconductor Trade Statistics (WSTS) data,
there should be positive worldwide semiconductor sales growth of
4.1% in 2014, followed by 3.4% growth in 2015. All products and
categories are expected to grow in both years, although wireless
and automotive are expected to grow the strongest with consumer and
computing staying relatively stable.
The major players in the industry may be categorized into
chipmakers (OEMs -- whether fabless or otherwise), equipment and
material suppliers, and foundries. The market positions described
below refer to latest available data.
According to estimates from IHS iSuppli, Intel and Samsung remained
the top two semiconductor suppliers in 2013. Qualcomm retained the
third position, followed by Micron, Hynix and Toshiba. Texas
Instruments didn't have a very good year, slipping from number four
to number seven, and was followed by
(BRCM), STMicroelectronics and Renesas.
The pureplay Foundry segment has undergone significant changes over
the past few years although the top five positions have not changed
much, according to research from IC Insights.
Taiwan Semiconductor Manufacturing Company
) remains the leader by far, followed by GlobalFoundries and then
United Microelectronics Corp
Semiconductor Manufacturing International Corp
) remains at number four, with Powerchip moving to the fifth
position. Additionally, Intel and Samsung are strong players with
leading edge capabilities. IC Insights says that the pure-play
foundries grew 16% in 2013 and will grow another 14% this year to
touch $41.2 billion.
Increased investment in capital equipment bodes well for equipment
suppliers this year. SEMI data shows strong positive growth across
most geographies, leading to a 23.2% increase in sales.
Gartner estimates that
) remained the largest equipment maker in 2013 driven by stronger
demand for its deposition and process control products.
), retained the second position and was followed by
), Tokyo Electron and
The semiconductor industry is made up of 11 sub-sectors within the
Technology sector, which is one of the 16 broad Zacks sectors. The
following table seeks to explain the position of companies in the
semiconductor market in the context of the Zacks Industry Rank.
We rank the 264 industries across the 16 Zacks sectors based on the
earnings outlook and fundamental strength of the constituent
companies in each industry. To learn more visit:
About Zacks Industry Rank
The outlook for industries positioned #88 or lower is 'Positive,'
between #89 and #176 is 'Neutral' and #177 and higher is
As indicated in the table above, the first 5 semiconductor segments
are positive, the next 3 are neutral, while the rest are negative.
The average rank of stocks in each sub-sector is indicated in the
last column [Note: Zacks Rank #1 for individual stocks denotes
Strong Buy, #2 is Buy, #3 means Hold, #4 Sell and #5 Strong Sell].
The broader Technology sector, of which Semiconductors constitute a
part, appears to be stable. Both the revenue beat ratio of 60.0%
and earnings beat ratio of 74.5% are solid (so far). The sector
performed significantly better than the S&P 500 on both counts.
Total earnings for the sector were up 3.8% year over year, compared
to an increase of 4.3% in the fourth quarter of 2013. Total
revenues were up 2.8% from last year compared to a 4.2% increase in
the fourth quarter.
The Technology sector is expected to be up 2.2% in 2014 and 10.5%
Some of the best opportunities in the semiconductor industry are
the memory players
). That's because both these companies will benefit from the growth
of mobile devices, both smartphones and tablets. These devices are
big consumers of memory (both DRAM and NAND), which increase demand
for memory makers.
At the same time, the industry is capacity constrained, which
makes for stronger pricing. Both companies have also increased
focus on new technologies like SSDs, which along with integrated
security will also enable them to target the enterprise segment.
There are some major weaknesses at the moment, but a company worth
). The company is a developer of LED technology, which is a pretty
hot market right now. But with LED backlighting becoming more
mainstream, competition from several Asian companies like Samsung
Cree was unable to sustain prices and margins, backing off
totally into lighting. But here it is up against even more
competition from established players like Phillips. So it has to
resort to aggressive pricing and heavy discounts, which are
impacting its profitability even as revenue increases. Analysts
have been lowering estimates for Cree, leading to increased caution
about the shares.
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