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By all accounts, 2011 looks like a flat year for semiconductor revenues, and 2012 may not be much better. A key for investors to focus are niche applications – markets that may not be huge, but offer strong growth potential. In my opinion, based on 26 years of analyzing these sectors, one market showing strong potential is the power semiconductor business.

Power semiconductors are $14 billion subset of the overall $300 billion semiconductor market. Manufacturers are a who’s who of the industry: Infineon Technologies, Toshiba, Fairchild Semiconductor (NYSE:FCS), Mitsubishi Electric (OTC:MIELF), Renesas Electronics (OTCPK:RNECF), STMicroelectronics (NYSE:STM), Vishay Intertechnology (NYSE:VSH), International Rectifiers (NYSE:IRF), Fuji Electric Systems, ON Semiconductor (ONNN), MicroSemi (NASDAQ:MSCC), and Texas Instruments (NASDAQ:TXN).

Power semiconductors are used in Notebooks, netbooks, desktop PC’s, servers, flat panel displays, TVs, graphics cards, game boxes, chargers, battery packs, AC adapters, power supplies, E-bikes, DVD/Blu-Ray players, set-top boxes, and networking equipment.

In addition, power semiconductors are essential devices for solar and wind power generation systems as inverters for connecting these systems with the electric power grid, and in a wide range of home electronic appliances, such as air conditioners. HEV and EV cars all use power semiconductors for inverters, and as this market grows, so too will be the power semiconductor market.

But it’s in next generation power semiconductors where the real growth lies. Traditional silicon-based power semiconductors are reaching their theoretical limitations. Fortunately because of their superior material properties, wide-bandgap power semiconductor devices (SiC [silicon carbide] and GaN [gallium nitride]) can offer performances orders-of-magnitude better than silicon devices.

According to a new report, "Next-Generation Power Semiconductors: Markets Materials, Technologies," recently published by The Information Network, these SiC and GaN-based semiconductors will exhibit an annual growth rate of 72% per year to 2015, compared to only 4% for standard silicon-based power semiconductors.

Not all the companies listed above have active next-generation programs. In addition, some companies don’t make standard products but do make next-generation ones, such as Cree (NASDAQ:CREE).

Equally important, these new power semiconductors will require novel methods of fabrication not seen with standard devices. Benefiting from the growth of these wide-bandgap devices will be processing equipment. Significant improvements on the technique of growing GaN material on Si substrates have enabled high quality, crack-free GaN epitaxy layers grown on Si. For GaN epitaxy on Si or SiC, Veeco (NASDAQ:VECO) and Aixtron (NASDAQ:AIXG) will benefit and grow strongly, utilizing their MOCVD expertise in LED epitaxy.

Silicon devices traditionally use wirebonding and standard packages. GaN on silicon can be bonded using flip chip technology. Companies benefiting would be equipment suppliers to the flip chip industry, such as NeXX Systems.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.