At first glance two of the major trends reshaping the semiconductor industry seem like polar opposites….
On the one hand, the industry is in the midst of a major boom. On the other, it's also contracting.
For tech investors these conflicting indicators raise two questions:
First, how is this contradiction possible?
Second, and more to the point, how can we make money from it?
After looking at the trends, I've come up with a plan for us to outperform the market over the long term with one easy investment…
Here's What's Driving This $30 Billion Industry
Turns out, the industry's boom is being driven by several expansions happening concurrently. We're talking growth in mobile, tablets, game consoles, and the broadband gear needed for e-commerce and online video streaming.
These drivers have had a substantial impact on semiconductor sales…
In fact, the Semiconductor Industry Association (SIA) recently announced that global sales reached $26.86 billion for the month of May. Not only is that figure impressive in its own right, it also represents fantastic industry-wide growth.
Moreover, it shows that global semiconductor sales have grown 8.8% year over year for the month of May, and 2% from the prior month. Research and Markets forecasts an additional 4.4% increase in worldwide chip sales for 2014.
And yet… the industry is consolidating. By that I mean we're seeing a major wave of mergers and acquisitions throughout the field.
Truth is, over the last several months chip firms have been on the prowl for mergers and acquisitions that add market share, sales, profits, and new patents to strengthen their current standing in the sector.
No doubt, these M&As had their original catalyst in an sector-wide slowdown in 2011 and 2012. These two lean years showed the industry had excess capacity.
But all the while, another catalyst was gathering force…
An ETF Capitalizing on a Seismic Industry Shift
I am referring to the rise of fabless semiconductor firms. These companies specifically focus on the design aspect, contracting out the actual production element of their operations. It gives them higher margins, which investors love to see.
And there was one more key event that helped lay the groundwork for the current wave of M&As.
Three years ago, Micron Technology Inc. (Nasdaq: MU) had nowhere near as much clout with investors as it does today. Now it is a clear leader in computer memory products.
It's also proved to be a very savvy acquirer. In many ways, Micron has really written the M&A playbook for chipmakers.
Last year, Micron bought Elpida Inc., a well-known supplier to Apple Inc. (Nasdaq: AAPL).
At the time, Micron's financials were a bit of a mess – it had reported losses in five of its ten fiscal years. Now, the company is in excellent financial shape.
Other major chipmakers followed suit, sparking a flurry of merger activity that continues to change the semiconductor landscape…
Last year, analog chip leader Avago Technologies Ltd. (Nasdaq: AVGO) announced a $6.6 billion deal to buy LSI Corp., a provider of memory products. The deal closed back in May.
Earlier this year, TriQuint Semiconductor Inc. (Nasdaq: TQNT), a company focused on radio frequency and microelectromechanical systems (MEMS) agreed to merge with RF Micro Devices Inc. (Nasdaq: RFMD). RF Micro is a manufacturer of high performance radio frequency systems, and the deal was valued at $1.6 billion.
And in June, Analog Devices, Inc. (NasdaqGS: ADI), which specializes in data conversion and signal conditioning, announced its plan to buy Hittite Microwave Corp. (Nasdaq: HITT), a fabless chip designer.
This is a trend that is likely to hand windfall profits to savvy tech investors. And I have a play in mind that provides plenty of upside while still reducing the risk inherent in focusing on a single stock in such a broad sector…
About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.