I Do Believe in Semiconductors - I do, I do!

Nothing bothers me more about the lack of market movement than the SOX!

I’ve been complaining about the SOX since the summer and, although they’ve recovered about 50% off their July lows, the semiconductors are still a far cry from last year’s highs, which came in the late winter.

It was the turn in the SOX, back in mid-August, that gave me the confidence to call for a "Major Upswing" in the markets at the time when I said: "If we get the same kind of breakout on transports (another 100 points) we could be seeing a new all-time high for the Dow and S&P."

The actual Philadelphia Semiconductor Index contains just 19 companies and yesterday it was not possible for Broadcom (BRCM) (+.73%), Intel (INTC) (+1.75%), Kla-Tencor (KLAC) (+.59%), Infineon Technologies AG (IFX) and Marvell Tech. Group (MRVL) (both flat) to hold up the 14 losers, led by Teradyne (TER) (-2.4%), Linear Technology Corp. (LLTC) (-1.7%) and Advanced Micro Devices, Inc. (AMD) (-1.7%).

Teradyne managed to drop 2.4% despite an upgrade (well, to neutral) by HSBC Securities. They had dreadful earnings on Thursday but I think they are mostly being dragged down by the sector with their close competitors just bottoming out, all well below TER’s flat YTD performance.

Linear Tech. is also scraping rock bottom as they missed estimates and lowered guidance while AMD is a lost cause on many levels. So the best we can hope for from these two is that they stop going down at some point.

But I do believe in Semis - I do, I do - and if we all clap our hands and say it loud enough perhaps we can revive them before we are left with nothing but a sad pile of nano-sized fairy dust.

All the wonderful toys we get are all made out of mysterious little semiconducting do-hickeys (the technical term) and it is fairly inconceivable that our modern economy can actually function without them since I now need them to brush my teeth and shave and my car no longer works without them, nor does my camera, my phone or even our dog (well, he is a robot-dog…).

Semiconductors are not an obscure side-show to the GDP of the country, they are almost as important as oil although, unfortunately for the 14 losers in today’s SOX index - nowhere near as scarce.

Now Intel has come up with a new "metal-gate" transistor that will take us to a whole new level of technology with 45 nanometer (i.e., small) core that will fit 820 Million transistors on a quad-core model. According to Intel, this is Phase One, and you ain’t seen nothin’ yet - which is an interesting thing to say since you really can’t see any of the 820M transistors individually as they exceed the minimum resolution your eye is capable of processing.

The upshot of this is two big things happen - you get more processing power and it uses less battery power. If you can believe the hype, we may be looking at 12-24 hour laptop charges and very usable portable video phones but, like all great tech breakthroughs, we have no idea what kind of amazing applications will come about once this tech hits the streets.

"The implementation of high-k and metal gate materials marks the biggest change in transistor technology since the introduction of polysilicongate MOS transistors in the late 1960s" claims Gordon Moore, Intel co-founder attributed with coining "Moore’s Law."

Intel’s lithography roadmap no longer ends at P1268, the 32nm node. Earlier today Intel revealed its 22nm node, dubbed 1270, slated for first production in 2011. With factorial increases in processing power already on schedule for 2008 and 2011, I don’t know what’s going to happen in tech but I’ll bet it’s going to be, as they said in 2010: Space Odessey - "something wonderful."

Comments

[Tom B:]

I like INTC.

2007 Jan 30 09:16 AM

[David Lentz:]

Me too -- I like INTC -- EXCEPT as an investment.

As Phil has astutely noted, the principal difference between oil and silicon is that while oil is controlled by a small number of very large companies, there is a large number of semiconductor companies all clamoring to compete to bring us new and ever-more-clever technologies using semiconductors in all kinds of new and innovative ways.

Through the miracle of competition and free markets, this means that there are not likely to be any large pools of profits for the companies to bask in. Intel's goal is to rude the curve of increasing capital expenditures needed to advance the bleeding edge of innovation down to ever-smaller sizes (produced on ever-larger wafers for somewhat higher costs per wafer), driving the cost to the consumer ever lower while improving their bang for the buck. Intel's hope is that eventually, the cost of building new fabrication facilities will be so high that they will escape the horde of smaller competitors nipping at their heels.

Imagine if the petrochemical industry was as successful as the semiconductor industry and approached their business in the same manner, squeezing more and more useful energy out of every drop of oil while concurrently expanding the known reserves at the consistent and predictable rate of doubling them every 18 months. ExxonMobil shudders at the thought.

While a tremendous deal for the consumer (that would be me and thee), it doesn't paint a very pretty picture for the investor. Better to invest at points farther up the product tree, in the companies that make things from chips or the companies that sell software (the ultimate product, one requiring no factories to replicate it).

2007 Jan 30 11:56 AM

[Tom B:]

"Intel's hope is that eventually, the cost of building new fabrication facilities will be so high that they will escape the horde of smaller competitors nipping at their heels."

Exactly. And they will. They've crushed everybody in their path so far, and AMD is showing signs of sever stress.

"companies that sell software (the ultimate product, one requiring no factories to replicate it)."

I hate software, because you usually end up competing with MSFT. Few companies manage that successfully.

2007 Jan 31 09:23 AM

[Saul Sterman:]

“…AMD is showing signs of sever stress.”

Do you mean 'severe stress' or 'server stress' as in computers or 'sever' as in dissolve? :)

INTC is not a monopoly. So they may use some heavy-handed tactics, who hasn't? KO, BAC, BA, GM, Rockefeller, Kennedy etc. Have you ever heard of plausible deniability? Ask your spouse for some lessons - just kidding.

2007 Feb 01 09:00 AM

[Tom B:]

Sorry about the typo-- I menat "severe".

"Ask your spouse for some lessons - just kidding." The marriage game is even more complex than the stock market! Spousal communications rival balance sheets in impenetrability, sometimes.

INTC benefits from fab being so capital intensive; thus, will squeeze AMD on CPU's until AMD decides to move on into a different segment of the chip market.

2007 Feb 02 08:54 AM