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...
The investment is SPDR S&P Semiconductor ETF (NYSE: XSD). The fund is a leading semi ETF holding a broad range of chipmakers. With this one play, we invest in roughly 50 firms covering nearly every conceivable aspect of the chip industry.
This ETF has beaten the DJIA by 266%.
And in terms of M&As, the best part is XSD owns both potential buyers and sellers. For example, it owns Micron, RF Micro, and TriQuint.
Another noteworthy holding is Intel Corp. (Nasdaq: INTC). The chip giant has remained at the industry's leading edge for decades. Armed with a new CEO and new products for mobile and wearable tech, the stock has entered into a strong uptrend.
XSD also holds Avago Technologies. Avago has made two major acquisitions in the last year. Most recently, it agreed to buy Silicon Valley-based chipmaker PLX Technology, Inc. (Nasdaq: PLXT) for roughly $309 million.
Meantime, Skyworks Solutions Inc. (Nasdaq: SWKS) ranks as a force in the mobile and broadband markets and is another top company held by XSD. With this stock, XSD is also investing in a number of end markets that cover everything from defense to medical to automotive.
XSD holding Rambus Inc. (Nasdaq: RMBS) is developing next generation chips for smartphones and tablets. It also makes semiconductors for security and lighting systems.
The fact is, chips are at the heart of high tech. From smartphones and PCs to our WiFi routers and GPS in our cars to LED lights in our homes, semiconductors make it all possible
XSD is a great way to take advantage of the semiconductor industry's growth and its unique position in the global tech ecosystem.
And over the past year, XSD's performance reflects the sector's unique vantage point. Simply stated, this ETF has just crushed the broader markets.
Consider that over the past year, XSD has gained nearly 28%. That's roughly double the S&P 500's returns over the same period.
XSD is an excellent way to invest in exciting new technology and the M&A boom - all with a vehicle that delivers market-beating gains.
This is an investment that will help you lower risk while building your net worth over the long haul.
About the Author
Michael A. Robinson is a 36-year Silicon Valley veteran and one of the top tech and biotech financial analysts working today. That's because, as a consultant, senior adviser, and board member for Silicon Valley venture capital firms, Michael enjoys privileged access to pioneering CEOs, scientists, and high-profile players. And he brings this entire world of Silicon Valley "insiders" right to you...
- He was one of five people involved in early meetings for the $160 billion "cloud" computing phenomenon.
- He was there as Lee Iacocca and Roger Smith, the CEOs of Chrysler and GM, led the robotics revolution that saved the U.S. automotive industry.
- As cyber-security was becoming a focus of national security, Michael was with Dave DeWalt, the CEO of McAfee, right before Intel acquired his company for $7.8 billion.
This all means the entire world is constantly seeking Michael's insight.
In addition to being a regular guest and panelist on CNBC and Fox Business, he is also a Pulitzer Prize-nominated writer and reporter. His first book Overdrawn: The Bailout of American Savings warned people about the coming financial collapse - years before the word "bailout" became a household word.
Silicon Valley defense publications vie for his analysis. He's worked for Defense Media Network and Signal Magazine, as well as The New York Times, American Enterprise, and The Wall Street Journal.
And even with decades of experience, Michael believes there has never been a moment in time quite like this.
Right now, medical breakthroughs that once took years to develop are moving at a record speed. And that means we are going to see highly lucrative biotech investment opportunities come in fast and furious.
To help you navigate the historic opportunity in biotech, Michael launched the Bio-Tech Profit Alliance.
His other publications include: Strategic Tech Investor, The Nova-X Report, Bio-Technology Profit Alliance and Nexus-9 Network.