Semiconductor Makers: Bucking the Downtrend

Wednesday the market sold off in the last hour and major indexes ended the day with losses. Semiconductor indexes were underwater pretty much the entire day and the iShares Semiconductor ETF (IGW) ended down 1.72%.

Two well-known semiconductor companies were able to buck the downtrend and close with gains. Who were they and what were the reasons? Are there clues as to who else might benefit?

Buried in the semiconductor supply chain are the companies that actually produce the chips for the firms that do much of the design work and handle sales to end users and OEMs. The two biggest contract manufacturers of semiconductors are Taiwan Semiconductor Mfg. (TSM) and United Microelectronic Corp. (UMC). The item that gave both these stocks a boost was an article on the DigiTimes web site discussing utilization rates.

The article quoted sources that indicated that both companies have

...seen a surge in demand for networking and wireless solutions. TSMC's 65nm-process capacity has been almost fully utilized, while UMC's average utilization rate at its 8-inch fabs remains at above 90%.

There is now an expectation that this will lead to both companies beating earnings expectations when they report later this month. Investors seem to believe it, as TSM gained 2.72% Wednesday and UMC gained 0.54%.

Other implications

Who else could be on track to beat based on this information? Some of the prominent customers mentioned in the article are Qualcomm (QCOM) , Broadcom (BRCM) and Atheros Communications (ATHR).

Tellingly, the article says that many of these chip orders are for short lead times. This suggests that OEM companies may be revising their demand expectations upward. This is good news for the tech sector in general. Maybe consumers, especially the gadget buyers, are finally getting ready to open their wallets.

The following chart contrasts some of the stocks mentioned above:

Disclosures: None

Comments

[Tom Armistead:]

A search of the Edgar database had 67 10-Ks within the past year which included the word "fabless," a majority of which identify themselves as operating under a fabless model.

Presumably some of these are included among the companies that are of interest.

Oct 22 02:56 PM