7 Reasons Semiconductor Stocks Will Shine in 2014

2014 should be a banner year for semiconductor stocks.  Barring any financial calamities all of the stars are lined up for strong growth.

Let's have a look at the factors that should cause semiconductor stocks to do well in 2014:

1) 2012 Capital spending was low:  After prices collapsed in 2011, semiconductor makers slashed their capital budgets, reducing their spending on plant and equipment.  This resulted in the price flattening the industry has experienced over the past year.  It generally takes 2 years for a change in semiconductor capital spending to create a shortage or oversupply, and the 2011 CapEx decrease, which has extended most of the way through 2013, has created a tightness that will become a full-fledged shortage in 2014.  Shortages re-establish profitability, and growing profits and revenues drive stock prices to increase.

2) Demand is strong: Despite concern about declining PC unit shipments semiconductor demand is doing very well.  Other applications (most notably cell phone handsets and tablet PCs) have driven demand increases that more than offset any loss in PCs.

3) The economy is doing well enough: Sure, things were better in early 2008, and in 2000, prior to the collapses that followed those two strong economies, and it's true that the Fed is treading extremely cautiously in an effort to get the US economy into better shape than it is today, but the world economy is doing well enough today to drive continuing strong semiconductor demand, and it doesn't look like semiconductor demand will be making any nosedives anytime soon.

4) A weak dollar increases foreign investments:  Although I am not one to condone the recent antics of our elected representatives, the dollar is weakening as a result of Fiscal Cliffs, Sequesters, and other desperate-sounding events, and that's a decided plus for US semiconductor company stock prices.  A weak dollar may indeed make foreign goods more expensive to US buyers, but it also makes US-based stocks more attractive to foreign investors.  These investors have a lot of money that is looking for a good home, and US company stocks are likely to benefit from an influx of foreign investment capital.

5) There will be more build-out of the Internet: It has become quite clear that there is a very strong relationship between the compute horsepower of a data center and its resulting revenue stream.  Big Internet service providers and web-based service companies continue to invest heavily to improve the user experience.  Instead of hanging onto old servers and storage until they are fully depreciated, these companies continue to "Rip 'n' Replace" their systems with larger, faster, and more efficient hardware.  This is driving solid demand for the chips in these systems that should continue for the next several years.

6) Lack of price elasticity: Back in the 1990s a colleague and I analyzed the short-term price elasticity of the DRAM market over a three-decade span.  Our finding: Only about 5% of DRAM's bit growth could be correlated to its price – bit demand grew at a relatively steady rate whether prices were high or low.  This phenomenon continues today.  Yes, shortages will drive price increases, but this will have very little negative impact on consumption.

7) This could be an extended shortage: There are indications that the current shortage will not be typical of semiconductor cycles, which usually have two "Up" years followed by two "Down" years.  Certain factors that I will describe in a later post are poised to extend this shortage anywhere from 1½ to 3 years longer than the cycles typically driven by capital spending.  This means that 2014 (or even 2013) could be the beginning of a very long period of profitability like those seen in 1992-5 or 2003-6.  Although it's too early to be certain, those who invest in 2014 will get a lot more out of an extended shortage than Johnny-come-lately investors who jump in towards the end of the cycle.

So there you have it.  A short list of reasons that this analyst expects 2014 to be a very good year for semiconductor stocks.

Keep in mind that I am not an investment analyst, and you should talk to your own adviser prior to making any investment, but semiconductors certainly deserve a close look when you are making these decisions.