Semiconductors: A less cyclical future

Geraldine Sundstrom, Tania Bachmann and John Mullins

A SEA change is occurring in the semiconductor industry. Once notorious for boom and bust cycles that revolved around demand for a few consumer devices, the chip industry now powers most aspects of our economy. This proliferation, in our view, will smooth steep cycles and drive durable demand, even as the economy slows and recession risk increases. Yet chip stocks still trade at a discount based on the cyclicality of the 1990s and 2000s. We think this presents an attractive opportunity for investors ahead of what we believe will be a market revaluation to higher multiples as earnings prove more stable than in previous cycles.

Evolution from cyclical to secular

Historically, semiconductor manufacturing ran in boom and bust cycles correlated with global GDP growth: Insatiable demand for a consumer product – such as PCs in the 1980s, mobile phones in the 2000s, and smartphones in the 2010s – would lead manufacturers to aggressively expand capacity. Supply eventually exceeded demand, either through overproduction or an economic downturn – sending prices and revenues down. A new end product or economic recovery would reignite the cycle. Reflecting this cyclicality, equity investors have historically paid lower earnings multiples for semiconductor stocks.