The Biggest Myth About Semiconductors

Dear Wall Street Daily Reader,

It’s time to welcome Howard Lindzon to the semiconductor party!

The wildly successful venture capitalist, founder of StockTwits, and raconteur perfectly captured the bull case I’ve been preaching since early 2020 in his latest blog post, Thank Goodness For Semiconductors.

“They are magical toys,” as he put it. “The internet, crypto, cars, drones, robots, AI, biotech, computers… they [semiconductors] power everything.”

Indeed!

In his post, Lindzon also identified a myth about the semiconductor market that I need to bust once and for all.

So let’s get to it…

Contrarian, Until It’s Not

For as long as I can remember, everyone’s insisted that the semiconductor market is cyclical.

“I used to say that,” confesses Lindzon. (Full disclosure: Me too!)

That implies investing in the sector is fraught with risk if you time it incorrectly — by buying ahead of a cyclical downturn, or selling ahead of an upturn.

That makes my insistence to buy every dip in chip stocks seem contrarian at best… and completely idiotic at worst.

Here’s the funny thing: as Winston Churchill famously observed, “A lie gets halfway around the world before the truth has a chance to get its pants on.”

I hate to break it to you. You’re being lied to when it comes to semiconductor cyclicality! And I can prove it with three simple charts…

Pattern Recognition 101

When it comes to math and the markets, there are clearly defined patterns.

Specifically: trends, cyclical, seasonal, and random.

They all relate to some variable over time, as you can see in the illustration below.

Headline: Pick Your Pattern

Patterns

  • Seasonal patterns involve fluctuations that repeat over a regular period, and hence, are predictable.
  • Cyclical patterns involve fluctuations that do not repeat over fixed time periods, and hence, are unpredictable and extend beyond a year.
  • Trend patterns can be linear or exponential, but clearly show a strong directional bias over time.
  • Random patterns, as their name suggests, are random, and beyond any general classification.

With all that fresh in your mind, now let’s look at semiconductor unit growth over the last four decades.

Semiconductor chart

Do you see a pattern? Me, too. And it’s not cyclical!

There’s a definite trend: up, up, and way to the right.

Now let’s look at semiconductor sales growth over the last three decades.

semiconductor sales

Do you see a pattern? Me, too. And it’s not cyclical!

There’s a definite trend: up, up, and way to the right.

So what’s going on?

Chips Ahoy!

I call it Tech-Biquity — the new era we’re living in where tech infiltrates more and more of our personal and professional lives. And eventually, it becomes a seamless component in, well, everything.

And guess what? No technology is possible without chips. So as tech’s pervasiveness keeps increasing, so does demand for semiconductors.

As Lindzon rightly concludes, “I won’t try and time the cyclicality,” but instead “just root for them…”

Yes, just root for them! Especially given the latest market developments…

First, the charts for the major semiconductor ETFs are breaking out to fresh all-time highs. Momentum is a powerful force. Embrace it, don’t try to fight it.

tweet chart

Second and more fundamentally, industry expert IC Insights just revealed chip demand is about to go off the charts:

“In a very rare event, 32 of the 33 major IC market categories defined by WSTS are forecast to enjoy an increase in sales this year, with 29 of the product categories expected to see significant double-digit gains. Strong demand across the entire IC market this year is projected to lift sales for the total IC market 24% and break through the $500 billion plateau for the first time in history.”

So, cyclicality be damned. Keep buying every dip in chip stocks.

Ahead of the tape,

Lou Basenese

Lou Basenese
Editor and Founder, Trend Trader Daily

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Louis Basenese

Louis Basenese is a professional investor, and one of the country’s leading technology analysts.

He’s spent the past 20 years analyzing emerging technologies, and developing a proven methodology to consistently profit from them.

Lou began his investment career at Morgan Stanley, where he was eventually tasked with directing over $1.5 billion in capital.

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