Thesis Semiconductor Market

Thesis Semiconductor Market-40
We prefer high-quality semiconductor companies whose valuations have priced in the worst-case scenario in the short term and fail to reflect the structural and secular trends that should moderate this downcycle and support long-term earnings growth.Within the commoditized memory market, we’ve focused on companies with low production costs, healthy balance sheets, and a commitment to returning capital to shareholders.

We prefer high-quality semiconductor companies whose valuations have priced in the worst-case scenario in the short term and fail to reflect the structural and secular trends that should moderate this downcycle and support long-term earnings growth.

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This arms race extends beyond the leading online platforms to the offline world, where the emergence of the Internet of things creates new opportunities in industrial and consumer end markets.

For example, in the utilities sector, machine learning promises to improve efficiency by balancing electricity supply and demand in a more dynamic fashion and identifying potential maintenance issues before they lead to system outages. The opportunity set reflects the migration of in-dash infotainment consoles and advanced driver-assistance systems from luxury vehicles to mid-market cars, as well as the electrification of additional automobile subsystems and the push for autonomous driving.

Important Information This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of December 2018 and are subject to change without notice; these views may differ from those of other T. Fact Set—Copyright © 2018 Fact Set Research Systems Inc. This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services.

Over the six months ended September 30, 2018, the semiconductor and semiconductor equipment industry lagged other technology industries dramatically, barely eking out a positive return at a time when the MSCI All Country World Index Information Technology posted the second-largest gain among the 11 economic sectors.

The pronounced weakness in this group reflected a perfect storm of fundamental and technical factors that weighed on share prices and investor sentiment.

The auto market arguably offers the most compelling growth opportunity on the consumer side, in our view, even if U. Semiconductors are at the heart of all these innovations, from the memory chips that are essential to training advanced neural networks on massive data sets to the analog semiconductors that process real-world phenomena into digital signals and enable local devices to communicate with the cloud.

As chips proliferate in more and more devices to enable data collection and monetization, the semiconductor industry benefits from volume growth and the improved profit margins that come from dealing with higher-quality customers than PC manufacturers.

Meanwhile, the high penetration rate in the smartphone market and an extended handset-replacement cycle raised concerns that this key growth driver had started to fade.

A wave of downward earnings guidance revisions across the industry ostensibly confirmed the market’s worst fears, prompting many investors to head for the exits.

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