It’s been interesting watching the investment media trying to establish why the likes of Intel and Qualcomm seem to be delivering such ordinary stock prices and returns, when in reality they still deliver technology critical to everything we’d automatically put in the ‘”cool things that are definitely coming along next” category. This situation affects all businesses delivering volume silicon-based devices that deliver; storage, wireless communications, number-crunching, graphics processing and communications but the list of real players is reducing rapidly.
Why? If you didn’t know the cost of silicon chips comes down to their physical size and the power they require to operate is directly related to that too. So when you’re making millions of devices if you can make the things smaller, or cram more features onto the same device it literally generates hard cash.
What’s happened now is the need for performance has pushed semiconductor manufacturers so far down silicon’s natural path that the cost of evolving is getting much much steeper, so much so that the investments needed are so vast they have to be funded more slowly or shared between the interested parties. This situation is also fuelling acquisitions where key technologies, such as those driving smartphones and 4G, are being acquired by the companies who can actually afford to maintain silicon’s evolution, hence we get fewer players too.
In my opinion either the investment media got brighter in the last year or so, or the industry has just got a lot better at explaining what it is doing and what it is actually spending its money on. Whatever the reason it is apparent by the comments against posts, on sites like Seeking Alpha, that a lot more is properly understood and some informed investors are watching the sector very carefully indeed. It has been a long time coming but the investors’ media has finally figured out that the chip business isn’t ever going away but also it’s now pretty good to see almost double-digit returns – and – if it’s slightly less than that there’s certainly no shame in it and anyway it is probably a worthwhile investment.
What they are all learning is that the sheer cost of remaining a player in this industry dictates that the huge returns of the 1980’s and 90’s are confined to history, and although fantastic growth with security was great, moderate growth with security is a pretty good alternative too.
Now the good news, the chip market saw the recession – and that’s no surprise. During his IEF conference in Dublin last month Malcolm Penn highlighted virtually zero growth in 2011 and a nearly -3% contraction in 2012. This year is looking positive at about 6% growth and next year he expects a rebound to about 25% growth, no there’s no decimal point missing there, revenue goes up by a quarter (see this video at the 15 minute point) – and that pace should carry on to take the industry beyond $500bn sometime in 2016, there has to be some worthwhile returns for someone in that lot.
photo credit: photosteve101