The PHLX Semiconductor Sector Index (SOX) has gained over 15% year-to-date, hitting record highs in March. Investing in semiconductor stocks has become a hot topic. In this article, we use five charts to guide you on the macro side of investing in the semiconductor segment.
▌1. Understand the Cyclical Nature of the Semiconductor Industry
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Released monthly by Semiconductor Equipment and Materials International (SEMI), semiconductor equipment billing data reflects the outlook of semiconductor manufacturers regarding chip supply and demand.
Increased equipment billings indicate optimism that demand for electronics in the end market will rise, prompting wafer fabs to increase equipment purchase and capex to boost production capacity. Conversely, an anticipated slowdown in demand leads to inventory buildup and reduced willingness among chipmakers to invest in new equipment, which usually also signals a downturn in the semiconductor business cycle. As the chart shows, global semiconductor equipment billings are highly correlated with the SOX Index most of the time.
Since semiconductor chips are widely used in consumer electronics like PCs and smartphones, the semiconductor industry is highly cyclical and often fluctuates with broader economic conditions. The cyclical pattern is evident in the chart, with an upswing typically lasting 1.5-2 years, and a complete inventory cycle spanning 3-4 years.
▌2. Analyze the Inventory Cycle with Inventory Days of Chip Manufacturers
Given the long lead time from order placement to shipment in the semiconductor industry, upstream IC design firms typically place orders early on. However, when downstream orders fall short of expectations (due to insufficient end-market demand) and inventory levels become too high, semiconductor stocks may see corrections.
The chart here shows the inventory days of major semiconductor companies across the supply chain, including upstream IC design houses (e.g., MediaTek, Broadcom), midstream wafer foundries (e.g., TSMC), and downstream firms focusing on consumer electronics...
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