2011 In Review - Semiconductors Get Chipped

By Stephen D. Simpson, CFA | December 29, 2011 AAA

Expectations for a tough year in semiconductors were already starting to build in late 2010, but most analysts and many investors have been surprised at the magnitude and length of the downturn. While end-user demand has remained relatively positive in most markets, order rates have slowed significantly and many chip stocks have taken a through bludgeoning for the year. (To know more about the technology industry, read A Primer On Investing In The Tech Industry.)

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Although industry stock indices can sometimes be misleading, the greater than 10% drop in the Philadelphia Semiconductor Index(SOX) is at least a starting point for framing the discussion.

A Few Big Winners
Although it has been a rough year as a whole, even the chip sector has had some notable winners. For all of the talk about a bad PC market and the company's lagging entries into smartphones, tablets and the like, Intel's (Nasdaq:INTC) market-beating higher than 20% returns this year have to go down as a surprise. Less surprising is the success of one of Intel's prime threats in those smartphone and tablet markets, technology licensor ARM Holdings (Nasdaq:ARMH), whose stock is up more than 40% for 2011.

There were certainly other areas of strength as well. Netlogic (Nasdaq:NETL) got a major boost when Broadcom (Nasdaq:BRCM) stepped up to buy the company and the stock is up almost 50% for the year. Elsewhere, connectivity specialist Mellanox (Nasdaq:MLNX) has seen nearly 40% returns this year, on the back of torrid revenue growth.

Analog in a Rut
When general chip demand sags, the analog makers can do little but go along for the ride. To that end, Linear Technology (Nasdaq:LLTC) has sunk about 10% this year, while Analog Devices (NYSE:ADI) has limited the damage to just a 5% retracement. Less-established and smaller ON Semiconductor (Nasdaq:ONNN) has seen its stock drop nearly 20%, due at least in part to the unfortunate natural disasters in Japan early in 2011 and the resultant market and production disruptions.

A Mixed Bag Tor Mobile
The performance of the smartphone and tablet markets has been a major influence in the chip sector, for some time now. As previously mentioned, ARM Holdings has risen on the back of its success in establishing its chip technology as the early incumbent. Likewise, Qualcomm (Nasdaq:QCOM) has used its incredible market position in mobile to deliver a market-beating 11% return this year.

Still, mobile has not been a panacea. Investors have begun to fear for the market share of Broadcom, Atmel (Nasdaq:ATML) and OmniVision (Nasdaq:OVTI) in their respective mobile niches and these stocks have had a rough go of it, with Atmel and Broadcom falling about 30% year to date and OmniVision plunging almost 60%.

Is 2012 Looking Like the Recovery?
Although both Altera (Nasdaq:ALTR) and Texas Instruments (NYSE:TXN) recently cut their quarterly guidance, both companies' managements claimed that customers are drawing down inventories and ordering fewer chips than would support their end-use shipments. That may well be a sign that the worst is over and that the sector could recover in 2012.

The Bottom Line
With so many stocks in the red in 2011, investors are somewhat spoiled for choice. With some thorough due diligence and a cooperative market, aggressive and opportunistic investors may just find that semiconductors show their worth again in 2012. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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