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Less Cyclical And More King Of The Mountains
During periods when the technology industry is in a fairly steady resting state, when most everyone has the latest form factor endpoint device, when the most recent tectonic shift in application delivery platform has settled down such that datacenters are mainly places you go to check the air-con still works, the semiconductor industry behaves like your regular cyclical industry that Boomers everywhere would recognize.
Semiconductor consumption is fickle, easy, low-cost and blows in the wind according to prevailing demand levels in the economy.
Semiconductor production is incredibly difficult, expensive, time-consuming and can only happen according to long-planned procurement and production cycles.
That’s not a great match, clearly. And it results in wild swings in the semiconductor market, as too much productive capacity comes on stream at just the wrong time, then not enough is available at the right time, leading to inventory pressures, supply shortages, and so on.
So in times of balance in tech, you have to be careful investing in semiconductor companies. Usually best to pick cyclical, capital-intensive industry monopolists or oligopolists like ASML or INTC and so forth, buy at a high p/e (yes, a high p/e, when earnings are on the floor but about to run up) and sell at a low p/e (when earnings have peaked) and all in all, be careful. Or take the easy route and just invest in software companies which are a lot less stressful and rarely disappoint if you pick the right ones.
But it is not a time of balance in tech. Tech is on fire. This is because the latest application delivery platform, cloud, has hit its stride; because consumer devices are cheap and highly capable; because telecom networks and home wireless networks are cheap and highly capable too; in short, the 1990s dot-com dream has come to fruition, just a couple decades late.
You think tech is highly penetrated now? It’s not. You think everyone has thought of everything already in tech? They haven’t. You think everyday devices aren’t going to get more connected, more data intensive, more computationally demanding? They are. And that means that the volume of semiconductor shipments is going to keep ramping in our view. Further, the complexity and average selling price of leading edge devices is also going to keep moving up in our expectation. In short, we believe we remain in a secular growth market for semiconductor earnings. And whilst $1 of earnings can be worth more or less today or tomorrow, if earnings growth in semiconductors does continue for the next few years as we expect, then we would find it strange if semiconductor stocks as a basket did not also keep moving up.
Picking individual semiconductor stocks can be rewarding; fortunately there are a number of ETFs that take the hassle out of it for you. Today we want to highlight $SOXL, a gonzo-levered way of generating value from up-moves in semi stocks.
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