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Is Semiconductor Growth Over? Think Again
FEB 01 2019
Makers of semiconductors are seeing valuations hit amid a cyclical downturn, but the future long-term growth picture remains intact.
Long-term projections are for revenue increases in the double digits in areas like high-performance computing and automotive
There are probably two to three quarters of weakness ahead. However, our view after meeting companies and industry specialists in China is that the issues impacting companies in the semiconductor supply chain – over-ordering, concerns over trade – are cyclical, not structural.
At the same time, the long-term goals for these companies remain unaltered. The largest are focused on understanding the technology requirements of their customers in five to 10 years’ time, not just what’s around the corner.
For that reason, while a slowdown in smartphone growth has impacted short-term demand, long-term projections are for revenue increases in the double digits in areas like high-performance computing and automotive. Higher-specification chips (7 nanometre), are required for innovations such as artificial intelligence and the move towards autonomous vehicles.
It is not all bad news in smartphones either. Even though smartphone shipment growth has slowed, the complexity of the handsets is still increasing, with increasing functionality resulting in higher semiconductor content per device.
Perception vs reality
The bottom line is that, without downplaying the short-term issues facing semiconductor companies in late 2018/early 2019, weaker share price performance can also be attributed to profit-taking from investors, not long-term company fundamentals.
Valuations of these companies are presently attractive as we believe the market is primarily viewing these companies in the short-term. Many companies in the semiconductor chain are focusing on sustainable long-term returns in their businesses, resulting in better supply-side discipline and therefore higher free-cash generation. A number of firms are returning this cash back to shareholders, either through buybacks or higher dividends.
For us, the long-term growth picture remains intact.
Authors:
Divya Mathur, Portfolio Manager, Global Emerging Markets
Orginally published: IS SEMICONDUCTOR GROWTH OVER? THINK AGAIN