According to a semiconductor market forecast compiled by Gartner Inc., semiconductor revenue should be reaching $257.7 billion by the end of this year. This is an almost 10% increase from $235.3 billion in semiconductor revenue that we saw in 2005, when the market only grew 7%. 

This is a market that’s grown 17 consecutive quarters. As today’s electronics pack more functions that require faster, more powerful processors, the semiconductor market will likely continue to grow to meet the needs.

However, obsolescence is both a catalyst for growth and one of the reasons that semiconductors can be such a risky investment. There is always a niche for new technology to fill, but it’s anyone’s guess as to how long it stays relevant. 

Take the mobile phone, for example. Less than two years ago, I purchased a cell phone that had green screen, monotone ring and no flashy accessories. Now, for the same price, I could purchase a phone with a color display, built-in camera, MP3 player and more. And people keep buying newer and better phones all across the world. In 2005 alone, more than 826 million mobile phones were sold worldwide.

I’m sure you’ve experienced the same thing.

As it turns out, the semiconductor company I am writing about today deals primarily with mobile phones and other personal electronic devices. Advanced Analogic Technologies (AATI: NASDAQ) designs semis called voltage regulators. These are the chips that regulate how battery power is used and distributed to various phone or PDA functions.

It all goes back to the new mobile phone with its many functions. You see, as the number of features on phones grows, the subsystems that require voltage regulation have also grown.

It might seem boring to some, but this is an important facet of the semiconductor market. In fact, the voltage regulator market is expected to grow at a compound annual rate of 17.3% through 2009.

Looking at just these stats, Advanced Analogic’s immediate future looks bright. However, there are some factors that could hold back this $230 million company in 2007.

First, AATI is a relatively young company. It began operations in 1998, obtained profitability in 2003, and went public in 2005. Since 2001, the company experienced rampant growth. Its revenue grew from a measly $1 million in 2001 to more than $68 million in 2005.

It is highly unlikely that Advanced Analogic sustains this growth as the company begins to mature. And if growth slows too much in 2007, investors could react negatively and send the share price plummeting.

However, over the course of its short life, AATI has won over some very prominent customers. It supplies its cutting-edge products to LG Electronics, Samsung and Motorola.

While a lot of this may look great, it’s important to remember how this particular sector behaves.  The semiconductor industry is highly cyclical. When semis are in high demand, companies can barely keep up with the demand. But if demand for the electronics that use these chips drop, then these companies can get slammed.

So a lot of outside forces are at play here. The semiconductor business in your sights could be the best around. But outside market forces could still crush any hopes you had to make a profit.

This information alone should be enough to convince you to stick to short-term plays on this sector. Attempting to buy and hold a semiconductor for the long haul could end up costing you big.

Best,

Greg Guenthner
December 18, 2008

Investing in Semiconductor Technology was originally featured in the Penny Sleuth.