Fairy Dust
Carl Johnson, INFRASTRUCTURE -- Semiconductor International, 8/1/2000
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During the early weeks of July, investors received a negative prediction from a Wall Street analyst. I have written in past articles that the semiconductor industry is linked inextricably to the health of the economy. After reading the report, I believe most of this negative forecast is based on a feeling that we will experience an economic slowdown. We described the analysis in one of our monthly letters as "a macro-gut call sprinkled with fairy dust."
In the days following this forecast, investors went on a selling spree. They dumped shares of capital equipment companies, semiconductor companies and end product manufacturers. This was the first negative forecast the street had heard in months. Shoot first; ask questions later. No one wants to ride stocks down if the industry is headed for a tailspin.
So what is an investor to do? If you are a long-term player, take advantage of the weakness. Short-term traders might play the stocks for a quick pop. Either way, there is opportunity. If you wory about the negative forecast, we want you to know we have talked with industry executives about this very item. In their humble assessment, the business seems to be doing quite well. The upcoming quarterly reports should emphasize that.
At INFRASTRUCTURE we are long-term believers in the growth of semiconductor content. We are not quantitative analysts, although equity valuations do play an important role in our asset allocation. What I mean here is that we are not going to tell you the semiconductor market will grow at 33.33% this year. We like to look at trends. The trend makes us long-term believers. We see the device market penetrating more and more of our daily lives. Whether that content is delivered via a PC, wireless phone, digital media player or home network does not really matter. New applications are being developed at a phenomenal rate. These new applications will drive device consumption.
How does one invest in this volatile industry with a long-term perspective? Here's how we do it: We describe the health of the industry by starting with a pyramid of the markets. The base of the pyramid is the electronic equipment market - all the stuff with semiconductor content. That market grows 5% to 8% per year, and exceeds $1T. The semiconductor market, which by many accounts will grow to $200B, is the next largest part of the pyramid. Then you have the capital equipment industry. When you plot the growth of all three markets, you find that the end electronics market grows rather steadily, while there is extreme volatility in the other two markets. We believe this volatility is created by technology transitions and over-/under-capacitization in the semiconductor market.
We think it is a great time to be invested in the sector. The next few quarters are going to be exciting. New fabs are being built, new applications developed and new processes implemented. Barring a macro-economic disaster, the semiconductor market should continue to do very well. Opportunity knocks.
Carl Johnson is president and co-founder of INFRASTRUCTURE (www.infras.com). He can be reached by phone at 1-972-492-7208.
