(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of SWKS.)
Chipmaker stocks could rise further based on the latest North American billings data for January, which jumped by 27.2 percent versus the same period a year ago. The steady growth occurred even as chip stocks got clobbered in the latest market downdraft, which saw stocks like Intel Corp. (INTC) fall by nearly 15 percent. But with another strong month of billings, the sector appears to be still extremely hot.
Skyworks Solutions Inc. (SWKS), Qorvo Inc. (QRVO), Micron Technology Inc. (MU), and Nvidia Corp. (NVDA) have been surging after each reported strong quarterly forward guidance. The January billings data apparently confirm the strong estimates several companies in the sector have projected.
Trends historically seem to be shifting as well, and with steady growth since 2011, the boom/bust cycle the sector is known for may slowly be coming to an end. And that could lead to further multiple expansion.
The billing data from January shows that growth since October 2017 has been accelerating again, after nearly 10 months of slowing. The 3-month billings average was $2.364 billion, up by almost 17 percent from October's low of $2.019 billion. That's a substantial growth over a relatively short period.
Tightly Correlated To Sector
The 3-month billings average stands at $2.364 billion and is fast approaching levels not seen since October 2000, when the 3-month average reached $2.573 billion.
There's a tight correlation between being billings and the semiconductor sector's performance in the stock market. Since May 1994, using the PHLX Semiconductor Index, the correlation stands at 0.70, making billing and the Semiconductor index highly correlated. Should billings continue to rise, it is likely the semiconductor sector will continue to gain as well.
Data From Semi.org
The Case For Multiple Expansion
The data also show why chipmakers also seem to trade at a cheap multiple when compared to that of the broader market, given the boom/bust nature of the group. But in recent years, that trend appears to be changing, with the declines in billings being more shallow, while the booms have not reached the same heights. (See also: Can Keynesian Economics Reduce Boom-Bust Cycles?)
Data From Semi.org
It's possible that if the cycles become more predictable and less of a boom/bust scenario, then investors may begin to value the group differently. Intel has notably traded at below-market earnings multiples since the early 1990's, except for only a handful of years, which could be attributed to the unpredictability of the cycles.
Data provided by YCharts
It may be too early to start assigning higher multiples to the group, but one thing seems clear: As long as billings remain strong and can continue to rise, the group is likely to do very well.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.