How to ramp coverage on semiconductors?

Based on the most helpful WSO content, here are some steps to ramp up coverage on semiconductors:

1. Understand the Basics:

   • Semiconductor Functions: Semiconductors are critical electronic components used in system designs, serving various functions such as microprocessors, memory, analog, logic, discretes, and sensors.
   • Market Size: The semiconductor market was just over $300 billion in 2013, with growth generally pegged to worldwide GDP growth.

2. Key Themes and Trends:

   • Enterprise Data: The use of NAND is broadening into higher value applications.
   • Sector Free Cash Flow (FCF): The rise of FCF is a significant theme as the industry transitions from a growth phase to a more mature era.
   • RF Integration: This is another important trend to watch.

3. Valuation Methods:

   • Traditionally, the semiconductor industry has been valued using price-to-earnings (P/E) multiples and EV/EBITDA multiples. This method was prudent given the growth nature of the industry.
   • As the industry matures, slower unit demand and excess capacity are leading to broader industry underutilization.

4. Inventory Cycles:

   • The semiconductor space has traditionally been traded off of inventory cycles, mimicking a ~6:2 ratio of builds to subsequent correction. Investors typically want to own through the early build quarters (6) and sell through the late build-early correcting quarters (2).

5. Industry Segments:

   • Computing: Estimated at $100 billion in 2014, accounting for 32% of total semiconductor revenues. Key companies include Intel, Marvell, Micron, SanDisk, Texas Instruments, NVIDIA, and Broadcom.
   • Consumer: Estimated at $55 billion in 2014, accounting for 17.5% of total semiconductor revenues. Key companies include Broadcom, Marvell, Cypress, Freescale, Texas Instruments, and Analog Devices.
   • Wireless: Estimated at $75 billion in 2014, accounting for 25% of total semiconductor revenues. Growth is seen in mid-range and lower-end handsets and tablets.
   • Wired: Estimated at $15 billion in 2014, accounting for 4.5% of total semiconductor revenues.

6. Key Companies to Watch:

   • Intel (INTC), AMD, NVIDIA (NVDA), ARM Holdings (ARMH), Broadcom (BRCM), Texas Instruments (TXN), Marvell, Cypress, Freescale, Analog Devices.

7. Geopolitical Factors:

   • The shift of semiconductor manufacturing to the US, as seen with TSMC’s $40 billion investment, is a significant development. This move is influenced by geopolitical tensions and the desire to reduce dependency on China and Taiwan.

By focusing on these areas, you can build a strong foundation for covering the semiconductor industry. Good luck with your future endeavors in this field!

Sources: An Overview of Technology Media and Telecom (TMT) - Part 1 of 2, An Overview of Technology Media and Telecom (TMT) - Part 1 of 2, Chips and 40 Yards | The Daily Peel | 12/8/22, Review My Stock Pitch