What's Up With the Chip Makers?

Sure, you know Intel (Nasdaq: INTC  ) . We all do. But Intel, impressive as it may sometimes be, is just one provider of semiconductors.

These tiny batches of electronic circuits designed to move data to and fro come in hundreds of forms, made by hundreds of companies. Today, thanks to our Motley Fool CAPS investor intelligence database, we'll take a look at a few of the more interesting prospects among the chipmakers.

No salsa for Mr. Chips
At first, chipmaking would seem to be the ultimate growth industry -- and it is, sort of. Think of your house. Almost everything within has a chip. The TV, the microwave, the phone, the thermostat, the ... well, you get the point.

With all that circuitry, you'd think chipmakers would make for slam-dunk investments. But big losers like AMD (NYSE: AMD  ) and Sigmatel (Nasdaq: SGTL  ) , both down 55% over the past year, prove otherwise. What gives? The industry faces tight competition, keeping margins under constant pressure.   

In addition, there are generally two types of chip companies: those which design and those which produce. Intel is the rare beast that does both. AMD, too. But a great many more are like Silicon Image, which draws up plans for chips to be used in DVD players and in other entertainment systems. Manufacturing is handled elsewhere -- likely by Asian fabricators such as Chartered Semiconductor (Nasdaq: CHRT  ) or Taiwan Semiconductor (NYSE: TSM  ) .

Time to invest?
Investors have, on the whole, remained lukewarm about semiconductors during 2007. For example, the benchmark Philadelphia Semiconductor Index (SOXX) has climbed just less than 4% so far this year -- a hair shy of the S&P 500 over the same period.

Meanwhile, in CAPS, the broad-line semiconductor sector has advanced 3.3% over the last 30 days. And only two of the 23 stocks named within have earned a five-star rating from the professional and amateur investors tracking the industry in CAPS.

Who are they? Hidden Gems pick FormFactor (Nasdaq: FORM  ) and Opnext (Nasdaq: OPXT  ) . I'll let my CAPS compadres explain the thesis for each, beginning with FormFactor. This top-rated pitch comes courtesy of CAPS investor DangerMoguls:

Good DDR2 (read: computer memory) play for the next PC upgrade cycle. I visited another probe card company and in general like the business. It's not an easy business to enter and you can grab control of a market -- like FormFactor has done with DDR2. What struck me was that the management of this private probe card company could only say great things about FormFactor. That made me notice.

And here's the top-rated pitch for Opnext, provided by CAPS All-Star luh:

Used to be a subsidiary of Hitachi (who still owns a 46% stake), Opnext designs and manufactures high-performance products for fiber optic networks. ... It specializes in the super high-speed markets that require products with 10 gigabits per second or faster. Forward P/E is 23; growth rate is about 50%. The stock therefore appears cheap.

One Fool's view
Both FormFactor and Opnext intrigue me. They serve distinct niches within the chip market, and therefore may not be subject to the same ruthless price-cutting that's killing AMD.

But my money's on Asian fabricators like Taiwan Semi. They stand to make money no matter how badly AMD and Intel bleed each other. Built to deliver innovation by the pound and on the cheap, the Taiwanese titans and their Chinese cousins can already handle the bulk of the world's chip-manufacturing needs. With talking Barbies, higher-tech hot rods, and TV-playing mobile phones, those needs should continue to grow exponentially.

What do you think about the chipmakers? Join more than 27,000 investors on Motley Fool CAPS and make your voice heard!

Make seven picks on CAPS by April 24, and we'll send you a free copy of The Motley Fool Five-Star Report. Inside, you'll discover how to use CAPS as a research tool, and you'll receive a recommended five-star CAPS pick poised to beat the market for the next decade or more -- one you can easily translate into profits for your real-world portfolio. Click here to get started now!

Fool contributor Tim Beyers, who is ranked 1,342 out of more than 27,200 investors in CAPS, owned shares of Taiwan Semi at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on Foolishness and investing may be found in his blog. Intel is a Motley Fool Inside Value pick. The Motley Fool's disclosure policy still occasionally has a hankering for Cool Ranch Doritos and beer. Mind if it takes a peek in your fridge?


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