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Semiconductor Companies: Where Are They In The Chip Cycle?

The semiconductor industry is notoriously cyclical. As such, semiconductor companies are subject to the ups and downs of regular chip cycles tied to the law of supply and demand.

When conditions are favorable, chipmakers have trouble keeping up with demand. But when supply exceeds demand — either through overproduction or a pullback in end markets — prices fall. In turn, so do chip manufacturing levels.

Investor's Business Daily divides semiconductor companies into three groups: chip manufacturers, fabless chip companies and chip-equipment makers.

Chip manufacturers own their fabrication (chipmaking) plants, while fabless chip companies hire contract manufacturers to make the chips they design. Chip-equipment vendors supply the gear and materials used to produce semiconductor products.

Is The Semiconductor Industry Growing?

Semiconductor industry sales turned south in late 2018, starting with memory chips. The downturn soon spread to other chip markets amid softening sales of smartphones, PCs and other products.

In 2019, the global semiconductor industry suffered its worst year in almost two decades. Semiconductor revenue fell 12% to $412 billion.

The semiconductor industry returned to growth in 2020 despite disruptions from the Covid-19 pandemic, according to World Semiconductor Trade Statistics. Chip sales rose 6.5% to $439 billion in 2020, the group said. It sees semiconductor sales rising to $469 billion in 2021.

The fastest-growing categories of semiconductors last year were logic and memory chips. Sales of logic chips rose 10.3% to $117.5 billion while sales of memory chips increased 10.2% to $117.3 billion.

World Semiconductor Trade Statistics sees memory chips being the fastest-growing category in 2021. It forecasts 13.3% growth next year for the category.

Semiconductor Companies Report Fourth-Quarter Results

The fourth-quarter earnings season has been mostly positive for the semiconductor industry.

Many top semiconductor companies delivered beat-and-raise December-quarter reports. They included Advanced Micro Devices (AMD), Monolithic Power Systems (MPWR), NXP Semiconductors (NXPI), STMicroelectronics (STM) and Texas Instruments (TXN).

Semiconductor companies with exposure to PCs, automotive and industrial markets outperformed in the fourth quarter.

Semiconductor equipment makers in general also delivered rosy reports. ASML (ASML), Entegris (ENTG), KLA (KLAC) and Lam Research (LRCX) were among the chip-gear firms posting beat-and-raise reports.

However, some semiconductor companies offered mixed results. They included Microchip Technology (MCHP), Qualcomm (QCOM) and Taiwan Semiconductor Manufacturing (TSM).

Sales for fabless chipmakers were hindered in the quarter by chip shortages caused by capacity constraints at foundries, especially Taiwan Semi.

Largest Semiconductor Companies

Chip stocks have risen amid the sector turnaround.

IBD's Electronics-Semiconductor Manufacturing group currently ranks No. 36 out of 197 industry groups. Two months ago, it ranked No. 59.

The group includes 32 semiconductor companies. The largest chipmakers by market cap are Taiwan Semiconductor, Intel (INTC) and Texas Instruments, in descending order.

IBD's Electronics-Semiconductor Fabless group ranks No. 93. However, two months ago, it was No. 20.

The group includes 31 stocks, topped by Nvidia (NVDA), Broadcom (AVGO), Qualcomm and AMD.

IBD's Electronics-Semiconductor Equipment group now ranks No. 32. Two months ago, it was in the No. 31 position.

It includes 34 stocks, led by ASML, Applied Materials (AMAT) and Lam Research.

Why Are Semiconductors So Important?

Semiconductors are important to the world because they power technologies that enrich the lives of consumers and make businesses and other enterprises run smarter, faster and more efficiently.

They provide the ingredient technologies for personal computers, tablets, smartphones and other gadgets. Semiconductors run communications networks and the internet. They are adding smarts to televisions, home appliances, automobiles and other devices.

Semiconductor chips also underpin such massive emerging trends as cloud computing, 5G wireless networks and artificial intelligence.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor companies.

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