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 on, 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.
End Market Perspective
Traditionally, the consumer and computing markets have been the
most significant drivers of semiconductor demand. These two markets
together remain the most important, but because of the gradual
convergence of functionalities, it is growing increasingly
difficult to identify which devices are computing and which
consumer. Semiconductors are spurring this change, facilitating the
The PC market will decline this year and will remain in the
doldrums for a couple more years. This softness will however be
more than made up by growth in mobile devices, particularly tablets
and smartphones. A lot of the growth in the next few years will
come from price-sensitive emerging markets, which is an added
Innovation in the mobile segment depends on the ability of
semiconductors to provide greater functionality and better
experience at higher speeds and consuming less power.
) is a significant beneficiary of the trend favoring mobile
computing, since its simpler processor architecture consumes less
power. As a result, companies like Qualcomm, Texas Instruments and
others have based their products on ARM cores. Intel appears to
have fallen behind in the race, but its recently-announced Bay
Trail processor based on the Silvermont microarchitecture could
make up for lost time.
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's position is far stronger 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 global
consumer electronics sales to be up 2.7% this year, following
better-than-expected performance in 2012. Tablet units (up 45% from
2012), smartphone units (up 17%), notebooks (up 53%) are expected
to be the strongest drivers. Other areas of strength include
3D-enabled displays (39%), networked-enabled TVs (34%) digital
imaging 22% and set top boxes 13%.
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 strong, with Ericsson, Huawei,
Alcatel-Lucent and Nokia Siemens remaining in control. 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, Internet of Things). This
should generate significant demand for semiconductors over the next
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 is expected to improve slightly in the U.S. and China while
remaining flattish in Europe. 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 demand.
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) has started
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 these markets continue to see
mixed results, depending on the customers served.
Demand may be expected to pick up this year, as most OEMs and their
channel partners have been reducing inventories and cutting
utilization. PC and microprocessor inventory reduction has been
significant, but should pick up this year driven by new product
launches. Handset inventory declines were significant exiting 2012,
driven by strong demand. Analog, discrete and storage inventories
were also pretty lean, according to research firm iSuppli.
DRAM supply is likely to be short of demand this year because of
its application in mobile devices like tablets and smartphones.
NAND demand is also accelerating, with most manufacturers already
ramping production (IC Insights). Standard logic will however
remain weak this year, but increase thereafter (iSuppli).
The reason for the weakness is continued steep declines in the
PC market, which uses the most standard logic. Demand will pick up
slightly thereafter due to stronger automotive and industrial
sales, which while being much smaller than the PC market, have seen
increasing consumption of standard logic components.
Another noticeable trend is the increased outsourcing of
manufacturing to foundries, which along with significant
acquisitions, is giving rise to more concentrated supply from a few
companies. The stronger demand and more concentrated supply should
result in firmer prices this year. IC Insights expects the stronger
pricing to drive a 50% growth in tablet processor revenues, 28%
growth in cell phone processor revenues, 13% in wired special
purpose logic, 12% in NAND and 11% in application-specific analog
Demand at the wafer level is also expected to be strong, with
) projecting a revenue increase of 6.8% in 2013. WFR is the primary
wafer supplier to foundries and other semiconductor manufacturers.
Forecast for 2013
According to World Semiconductor Trade Statistics (WSTS) data,
there should be positive worldwide semiconductor sales growth of
4.5% in 2013, following the 3.2% decline in 2012. Gartner and IC
Insights are close to this, with projections at 4.5% and 6.0%,
respectively. iSuppli and IDC more optimistic, predicting sales
growth of 8.2% and 6.9%, respectively.
The major players in the industry may be categorized into
chipmakers (OEMs-whether fabless or otherwise), equipment and
material suppliers and foundries.
According to estimates from IHS iSuppli,
) and Samsung remained the top two semiconductor suppliers in 2012.
) slipped to number four, as
) jumped from the sixth position in 2011 to the third in 2012.
Toshiba, Renesas, Hynix,
) made up the next few positions with only Hynix and Broadcom
Applied Micro Devices
) dropped to number 12, behind Sony, which advanced two positions.
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
). Chinese foundry
Semiconductor Manufacturing International Corp
) remains at number four, with specialty foundry
) in the fifth position. Additionally, Intel and Samsung are strong
players with leading edge capabilities.
Leading edge investments remain very strong at market leaders TSM,
GlobalFoundries, Intel and Samsung. TSM has recently increased its
capex estimates for 2013 by $1.5 billion, making it the largest
spender this year. Its agreement with Apple will likely spur
investment at advanced technology nodes.
GlobalFoundries is spending 18% more than last year, but the
foundry expects to spend much more next year. Samsung also raised
capex projections by a billion dollars. Intel was the only one
lowering, although it will still spend enough to make it one of the
top three spenders.
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Increased investment in capital equipment bodes well for equipment
suppliers this year. However, while foundries and memory
manufacturers take the lead, spending on the logic side will be
slower. SEMI data shows positive bookings trends in the first few
months of the year, although growth expectations remain modest at
0.4%. IC Insights is slightly more positive, projecting an increase
In a recent report, Gartner estimated a 5.5% decline for 2013,
given first half weakness and continued improvement through the
second half. Growth is expected to be a very strong 14.2% in 2014,
followed by a 10.1% increase in 2015.
Gartner estimates that
) regained the number one position in 2012 driven by stronger
demand for its deposition and process control products.
), which had taken the lead in 2011 as a result of increased demand
for EUV tools moved back into the second position.
) occupied the fifth position.
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
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 6 semiconductor segments
are positive, while the rest are neutral.
So it is not surprising that the average rank of stocks is below
3.00 for most of the segments [note: Zacks Rank #1 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 50.7%
and earnings beat ratio of 66.7% were solid. The sector performed
slightly better than the S&P 500 on both counts.
Total earnings for the sector were down 10.1% year over year,
compared to an increase of 5.7% in the first quarter of 2013. Total
revenues were up 0.4% from last year compared to a 1.5% increase in
the first quarter.
The Technology sector is expected to be up 1.3% in 2013 and 11.1%
As evident from the above discussion, companies like
) represent good investments.
Others like ARM Holdings and Intel are somewhat riskier bets, but
may still be considered by the brave of heart.
There are currently no significant weaknesses in the industry.