One Niche Play in the Explosive Semiconductor Industry

Jan 28th, 2008 | By Jim Nelson | Category: International, Technology

Forty-three years ago, Gordon Moore predicted the most insightful technological “law” in modern history. Here’s the full story…

Moore received a Ph.D. in chemistry and physics from Caltech in 1954. A few short years later, he co-founded Intel Corp.

Early investors who sunk just $1,000 into Moore’s Intel Corp. in 1986 have had the chance to see 5,446% returns on their investment…

But apart from his Intel success, he’s also one of the most decorated innovators in history. He received the National Medal of Technology in 1990 and the Medal of Freedom, the highest civilian honor, in 2002.

His awards, however, are nothing compared with what he gave the technology world in 1965…

In an article written for Electronics magazine, Moore developed a theory that become known as “Moore’s Law.” This law predicted that the number of components the computer industry will be able to place on a computer chip will have to double every year or two.

His prediction has come true. Take a look at this chart:

The chart proves that Moore’s Law is true, time and time again. You’ll see that a new computer chip has come out, on average, every two years.

My point is that when Gordon Moore speaks, we should listen.

To the “average” investor, an easy way to invest in the success of Gordon Moore would be to continue to buy into Intel Corp.

But as you know, Intel is too big of a company to show us quick gains… It’s too slow-moving.

So we started looking for another one to take advantage of this industry standard. We found one. It’s a hidden, under-$4 company that can make you some serious returns using Moore’s Law.

More on that in a minute…

The New Outsourcing Boom

The process from initial development to final testing of semiconductors is a long one. To simplify it for our purposes, there are five general stages: circuit design, silicon wafer fabrication, wafer probe, assembly and final test. For the designer, the two most time-consuming stages are circuit design and wafer fabrication.

It might take several months to design a better way to place more transistors efficiently on a circuit. And wafer fabrication is also a time-consuming and expensive process, in which each silicon wafer is stacked on the circuit. Many companies, at this point, outsource the rest of the process to save on costs. This outsourcing is called “fabless manufacturing.”

Fabless manufacturing refers to chip developers that don’t do their own fabrication or manufacturing. It is nearly impossible — unless you are talking about the semiconductor giants like Intel and IBM — to fund a cutting-edge research and development team, as well as the equipment and staff to manufacture, refine and test these products.

You see, the equipment that tests and assembles these circuits is expensive. On top of that, you need experts in the semiconductor field to operate the assembly and testing machines. In the past, this cost and expertise that Moore’s Law demands has put a strain on semiconductor developers. But now, there’s one tiny company that can take advantage of the constant technology advancement without the hassles of cost or industry cycles…

While the U.S. Struggles, Taiwan Is Picking up the Slack

This company has been a leader in semiconductor assembly and testing for years. The semiconductor business is booming in Taiwan and mainland China. And that’s right where this company lays its head. The U.S. semiconductor industry, on the other hand, has been slowing. With the falling dollar, mortgage crisis and an almost certain U.S. economic recession, electronic companies that rely on semiconductors for use in their devices are looking east… Far East…

Think about this for a minute… Every time you make a call, check your e-mail and turn on your TV, there is a semiconductor making that phone, computer and television run quickly and efficiently. Even more semiconductors will be needed as we see tons of new products like Apple’s iPhone, a possible Google phone, video game consoles, computers and much more racing to store shelves. And for the most part, electronics makers aren’t getting the semiconductors in the U.S. The makers of these devices are pushing the semiconductor industry in Taiwan along.

We cannot overlook the importance of Taiwan. Somewhere between two-thirds to three-quarters of the world’s semiconductor foundry capacity is in Taiwan. And because of the close proximity to China, the world’s leading electronics manufacturer, Taiwan is the future of semiconductor development and manufacturing.

The Gateway Between U.S. Consumption and Chinese Manufacturing

The second largest U.S. export to China is semiconductors intended for Chinese electronics manufacturing. Now many U.S. companies are starting to outsource their own manufacturing. This gives us a great opportunity to invest in the middleman.

You see, semiconductor development is too cutthroat to find a good investment in. The big players dominate this field. But with assembly and testing, the pressure of Moore’s Law is removed. The goal here is to sign up as many of these developers as possible.

The Chinese have already experienced this problem to a different degree. There aren’t many successful semiconductor businesses in China. China makes only about 7% of all the semiconductors globally. However, China consumes about 90% the semiconductors produced worldwide.

This works out well for companies like this sub-$4 one. With longstanding relationships with U.S., Japanese and Indian semiconductor developers, and the inside relationship with China, it is in a golden position to act as our middleman.

Sincerely,

Jim Nelson
January 28, 2008

P.S.: Sorry for stopping this short, but I can’t give away any more than that for now… You see, Greg Guenthner and I just recommended this company to our Penny Stock Fortunes readers a few days back. But, you didn’t miss your opportunity… You can get in now while it is still below our buy up to range.

Jim Nelson

Jim Nelson is the managing editor of Penny Sleuth. He has been playing the stock market since he was 14, always with a preference toward smaller companies. He has honed his stock picking skills at Agora Financial since 2004, effectively combining a growth and value approach. Like Greg Guenthner, Jim also contributes to Penny Stock Fortunes on top of bringing you the Penny Sleuth every weekday.

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