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Strong Fundamentals for Semiconductors

The semiconductor and semiconductor equipment industry is arguably the most cyclical in the entire technology space and an industry to focus on as signs of improving US economic growth materialize. According to S&P Capital IQ, important factors to consider when looking at the fundamental health of the industry include end-demand prospects and capital spending initiatives, among other things.

S&P Capital IQ equity analyst Angelo Zino thinks the semiconductors & semiconductor equipment industry is benefiting from healthy end-market demand for its products, specifically within the smartphone arena. Meanwhile, semiconductors related to automotive and industrials should continue to benefit from more content per vehicle as consumers look to purchase cars that have more features on the dashboard and more wireless capabilities. According to Zino, the biggest uncertainties and challenges are likely to be PC and tablet related; S&P Capital IQ forecasts a 5% drop in PCs shipments and envisions a more pronounced 5% to 10% decline for tablets this year.

Longer-term S&P Capital IQ expects capital spending to be robust as manufacturers like Intel, Taiwan Semiconductor, and Samsung keep budgets elevated, given competitive pressures and investment in next generation technologies.

Given the combination of decelerating industry growth and healthy balance sheets for industry bellwethers, consolidation is likely to be a key theme within the space. Ten of the 52 companies comprising the S&P 1500 semiconductors & semiconductor equipment industry each hold more than $2.8 billion of cash and equivalents on their balance sheets Since falling to $8.1 billion in announced M&A transactions in 2012, deal activity in the semiconductors & semiconductor equipment industry involving S&P 1500 companies as a buyer, seller, or target climbed to $12.7 billion in 2013, then $13.7 billion in 2014.

Investors seeking exposure to the semiconductors & semiconductor equipment industry can gain exposure through a few industry-focused products. The largest is iShares PHLX Semiconductor (SOXX), with $465 million in assets. The ETF recently had 74% of assets tied to semiconductors, but also 13% to semiconductor equipment companies; exposure also included some communications equipment companies. The ETF has a 0.47% expense ratio and has a $0.03 bid/ask spread.

SPDR S&P Semiconductors (XSD 90 Marketweight) is a smaller ETF, with $195 million in assets, but has exposure to semiconductors companies only, including small-caps .Top-10 holdings comprised 27% of assets making the ETF more diversified than SOXX that has 56% in its ten largest positions. The ETF has a 0.35% expense ratio and a $0.07 bid/ask spread.

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