But the truth is, semiconductors have always been — and will always be — a very big deal as both investments and as drivers of technological progress.

Advances in semiconductor technology are directly responsible for continued economic expansion around the globe. In the United States alone, the semiconductor industry is responsible for over 225,000 jobs and over $10 billion in annual sales.

Worldwide semiconductor sales eclipsed $225 billion in 2005. Manufacturing in South Korea, Japan, Taiwan and Malaysia are all immensely buoyed by the semiconductor industry.

But what’s truly appealing about investing in semiconductors is that the industry tends to eat itself every few years.

The Semiconductor Industry Association (SIA) reported that nearly 17% of industry-wide semiconductor sales revenues are reinvested in research and development each year. Another 10% of sales revenue goes back to upgrades in equipment.

Great numbers. Wonderful story. But it’s not exactly a breaking news flash to assert that investing in semiconductors is a solid strategy.

After all, semiconductor people are the eggheads we partly have to thank for our purchase of a hot new computer in 1997 with all the bells and hard drive whistles that went the way of the cutting edge dodo in six months.

That’s the “industry eating itself” I’m talking about. Advances in technology can — and often do — move faster than marketplace turnover is able to support.

2007 is no different. Though much has changed since your Packard-Bell home ice-cream maker was ushered into obsolescence by the sexy Pentium 2 models back in the mid-1990s, the template of quickly dying technology remains.

Gone are dial-up modems, the usefulness of America Online (AOL), waiting a half-hour to scan a photo and those old tube monitors with their pinging screen static. Today, the rage is “clarity of content.”

From personal computers to portable media gadgets, from home theaters to mobile devices — High Definition (HD) is where the action is today. The lines are sharper, the resolution is better, and the colors are more vivid and bright.

Watching football in HD, for example, is a revelation. Four out of five people, upon experiencing HD for the first time, say “Whoa!” The fifth person faints.

I’m kidding. But the advances just in HD television in the past few years have been staggering — and it’s a “here to stay” advance that’s changing the way we think of viewing media.

Clarity is also coming to the mess of wires and cables behind the TV.

High Def Multimedia Interface (HDMI), the worldwide protocol for the connection of personal computing and home entertainment hardware, is changing the way we think about hooking our gadgets together.

Where it once required a maze of cables and connectors to bring HD content to life, HDMI makes it possible to view and hear HD quickly, cleanly and without the hassle of having to spend an hour laying out cables on the living room floor and connecting them to hardware one by one.

Bottom line is this: Continued advances in semiconductors are bringing HD to new markets and new devices. HDMI is making that process easy and user-friendly.

But it all starts with the semiconductors.

Intel (INTC: NASDAQ) is up better than 29% in the past year, and Analog Devices (ADI: NYSE) has traded up more than 28%. The catalyst for these moves is simple enough.

The industry reinvents itself every 18 to 24 months and the HD wave, including spectacular advances like Blu-ray DVD, is gently pushing consumers toward next-generation content and content delivery devices.

Hidden in the semiconductor industry though is a small, ignored firm with rapidly improving numbers. This company has year over year increases in total revenue of 22% from 2004 to 2005 and 38% from ‘05 to ‘06. Total revenue for the six months of this year ending June 30 was up 14% from the same six months in 2006.

This company has its hands in semiconductors for just about every possible use you can imagine, including inroads with suppliers of HD technology, and a backdoor angle to make even the major Silicon Valley players jealous.

Semiconductor demand isn’t going anywhere but up as today’s coolest gadgets become tomorrow’s 8-tracks and CB radios. And the current penny stock companies sitting on the cutting edge of the next wave of industry reinvention stand to take off in a hurry.

Regards,
Aaron Gentzler
September 3, 2007

P.S.: The small growing company and frontrunner on this HDMI technology that I alluded to earlier is still sort of a secret. The only word out on it came on Thursday last week from one of your Penny Sleuth editors, Greg “Gunner” Guenthner. Gunner presented his readers with the full report in a Penny Stock Fortunes “special alert.”

Small-Cap Computer Stocks was originally featured in the Penny Sleuth.

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.