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3 Things You Should Know About the Semiconductor Industry

Singapore’s manufacturing scene performed well last year, contributing a large part to the country’s overall gross domestic product growth. Amongst the manufacturing industry, the semiconductor sector was the hottest, growing by more than 20%. In line with that growth, many companies that operate in that space reported outstanding results last year. Stock prices inevitably followed suit, with some even doubling or tripling in price.

As we start 2018, many are expecting the strong performance of this sector to continue. Investors who wish to gain exposure to this sector should, however, be familiar with the ins and outs of it before they invest. With that in mind, I want to highlight three important facts of the semiconductor business that we should be aware of before investing.

What is a semiconductor?

If you were like me, with no engineering background, you would probably have no idea what a semiconductor is or does. Well, to put it simply, a semiconductor is a small device used in electronic circuits. It can be found on your personal computers, cell phones or even your electronic toaster.

There are four main product categories within the semiconductor sector. They are (1) memory chips, which help store data, (2) microprocessors, which are central processing units, (3) commodity integrated circuit and (4) complex system on a chip or SOC.

There are multiple steps in the process of manufacturing semiconductors. Companies can either operate on the supply side or as an end producer.

The semiconductor business is cyclical

Demand for semiconductors depends on the need for devices that use semiconductors. Although in the long-term, the semiconductor sector has generally risen over time, this trend is not smooth, and there are periods of down-cycles when demand is muted.

The cyclical nature of the industry can be both good and bad. For one, investors can be certain that after a down-cycle, demand will eventually pick up. However, it can also mean wild swings in profitability for the companies involved in the industry, and likewise, volatility in a company’s share price.

Research and development is key to a company’s continued success in this arena

The semiconductor sector is highly competitive with numerous companies trying to take advantage of the boom in semiconductor demand in recent years. As such, semiconductor manufacturers need to constantly upgrade their product and technology to produce the best and most cost-efficient product.

The speed at which the industry has grown can be illustrated using Moore’s law. Gordon Moore, the co-founder of Intel, predicted that the number of transistors on a chip will double every two years. This has challenged industry players to constantly upgrade their technology to try to keep pace with the industry as a whole. If you fall behind, you will inevitably be left eating the dust of the competition.

The Foolish bottom line

The semiconductor business is a competitive industry to operate in. However, with the recent surge in demand, companies have generally prospered. If you want to invest in this space, it is vital that you look out for companies that have a strong competitive advantage and are constantly upgrading their technology so that they can withstand the tough down-cycles of the sector.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.