While the semiconductor space has fragmented into many sub-sectors that have relatively less correlation with each other, the fact remains that 2010 was still a pretty strong year for chips. Worries about the strength and persistence of the economic recovery and the computer sector weighed on some stocks, but most companies benefited from customers replenishing their inventories throughout the first nine months of the year.
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As is often the case, investors traded these stocks on the basis of guidance and worries that the sector might have peaked in 2010. This is a battle that will be resolved in 2011. The question is whether 2010 was the high water mark in the chip recovery, or is the first half of 2011 just a pause in an overall upward trend and longer recovery cycle?
Smart? Very Smart
The torrid growth of smartphones, and the introduction of tablets, feels like one of the most significant factors for chip stocks in 2010 and going on into 2011. Companies like Broadcom (Nasdaq:BRCM), ARM Holdings (Nasdaq:ARMH) and Atmel (Nasdaq:ATML) saw their stocks do exceptionally well as investors paid up for their exposures to this consumer segment. Conversely, Qualcomm (Nasdaq:QCOM) and Maxim (Nasdaq:MXIM) failed to outperform even though both companies are highly leveraged to these markets. (For more, see The Chips Are Down.)
Networking Paid Off This Year
Within the overall positive performance of chips in 2010, companies leveraged to networking did exceptionally well. Broadcom double-dips here (with the smartphone space), while purer plays like Cavium (Nasdaq:CAVM) and Mellanox (Nasdaq:MLNX) had exceptional years. With ever-greater demands on networks and increasing functionality in chip sets, it looks as though this sub-sector could see another good year of demand from customers like Juniper (Nasdaq:JNPR), F5 (Nasdaq:FFIV) and the like.
Analog Won't Die
Analysts seem to perpetually predict doom and gloom for the analog space, but many of these companies continue to chug along. Granted, Analog Devices (NYSE:ADI), Linear Technology (Nasdaq:LLTC) and Maxim (Nasdaq:MXIM) did not do that great relative to the industry (though Texas Instruments (NYSE:TXN) did), they were all up by double-digit amounts for the year and kicked out decent dividends along the way. While shorter lead times, smaller orders and less inventory building will tone down growth at least in the first half of 2011, these companies should all be levered to ongoing economic recovery around the world.
Computers Not The Place To Be
With smartphones and tablets cannibalizing demand and Asian competitors becoming more significant in the supply chain, this was a tough year for chip companies focused on the computing space. Intel (Nasdaq:INTC), AMD (NYSE:AMD) and NVIDIA (Nasdaq:NVDA) all lagged the broader semiconductor industry. What's more, most of the story about 2010 concerning Intel was what the company was going to do about getting deeper penetration in phones and tablets - not exactly a rousing endorsement for the future of the PC.
2011 - The Year Of Doubt
No good quarter in the semiconductor space goes unpunished, and companies could barely talk about the double-digit revenue rebounds in their business without facing analyst scrutiny and skepticism about the next quarter's orders. To that end, it seems pretty clear that the first half of 2011 is going to represent a slowdown from the rebound growth seen in the first nine months of 2010. (For more, see A Primer On Investing In The Tech Industry.)
The real question, then, is whether it will be a pause that refreshes or the top of the cycle. If consumers keep demanding more phones, more gadgets, more memory and more bandwidth, it seems relatively easy to see early 2011 as a pause in an ongoing recovery. Time will tell, but with leading companies back from the depths of the recession investors should, at a minimum, keep an eye on value as the year progresses. (For more, see The Ups And Downs Of Investing In Cyclical Stocks.)
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