Is the Semiconductor Industry's Boom-Bust Cycle Finished?

Historically, the semiconductor industry has been prone to cycles. Periods of soaring demand are followed by periods of drought, causing some wild swings in many chip stocks. But some news reports predict that because of demand for chips throughout the economy, these boom-bust cycles might be over. Fool.com contributors Billy Duberstein, Jose Najarro, and Nicholas Rossolillo talk about how things have changed for the semiconductor industry in this Motley Fool Live segment from "Semiconductor Revolution," recorded on Jan. 6.

Billy Duberstein: What Bloomberg is saying is that semiconductors are now going into so many different devices between 5G, cloud datacenters, phones, PCs, laptops, cars are using more and more semiconductors that the demand is becoming so diversified and that supply is becoming so expensive to bring on. It's going to be much more of a steadier business going forward, more like a steady growth business rather than a cyclical business with booms and busts. 

If that happens, then a lot of these stocks still have room to run because while the semiconductor stocks and semiconductor equipment stocks and memory stocks have generally done pretty well over the last two or three years or so with the current chip shortage, if they post more consistent results, they could get a higher PE multiple in the market if investors start viewing them as more stable businesses.

They're producing a lot of cash now, they're growing everything you want. They're just not trading quite as highly as software names, certainly e-commerce names and even the big [technology] names. There's trading in line with, a lot of them trading in line with big bank stocks. But if it becomes a steadier business, then these stocks will continue to do well.

Jose Najarro: Billy, I don't know if you were taking a quick look at Slido but I think you answered ProShopGuy's question. He asked, historically the semiconductor industry has been a boom-and-bust as products seem to commoditize, chipmakers ramp up, production, and prices go down. Is this time different for the next 2-5 years? To some extent --

Duberstein: This is the big question that we're all grappling with because growth has been so good. Really, there was a bust in late 2018, 2019, when the U.S.-China trade war kicked in and tariffs and higher interest rates. But there has been really good growth in late 2019. Then once the pandemic hit, growth held up, we didn't know what it was going to do, but the growth was really strong in 2020 and it's certainly booming now on the chip shortage in 2021. 

A lot of these companies are booked through 2022 for another good year. It'll be something like three pretty good years in a row which is a good sign that we could be in a steadier growth environment. It's probably also making some people nervous that we're getting to the end of the boom but it appears that things are getting more stable to me. Of course, there's always the risk of the economic downturn, but the pandemic only sped up digitization, digital transformation. Really, a lot of the technologies that give businesses competitive advantages comes from these digital innovations and applications. 

I'm sticking with my favorite semi stocks. I'm not getting nervous with higher interest rates and volatility. A lot of people who traditionally use these stocks to play the cycles, a lot of hedge funds, and active investors, they try to time the cycle. But I think you can really probably hold these with an eye holding them for the long term which we always like to do here.

Najarro: One thing I think we discussed last time Billy so when we were talking about the cycle. It seems like, it was historically it's been a cycle, but that bottom of the cycle has always been higher than the previous one. ProShop, I feel like it's where I'm going to say yes and no. It's both going to be a little bit different and a little bit of the same. We might experience those same cycles maybe as sometimes companies might over order, might just not know what to do with so much product but I think that cycle might be shorter than previously we've seen.

Duberstein: The depths of the trough will likely be shallower and higher. It won't be quite as much boom-bust but it'll still move around, won't be a straight line out. But if you can make it less volatile, it's still going to be a good thing for these companies and their stocks. It's much easier to deal with a steadier business than it is if you're worried about your profits evaporating next year, if your profits go down 5 or 10% big deal, if they go negative and you're indebted, that's a whole different story and that used to be the past of the industry. Now, a lot of these companies are swimming in cash, they're repurchasing stock. They're paying dividends. Their balance sheets are good so they are much safer than they have been pre-2015, I guess. Anyway, that's my take.

Najarro: Nick, anything?

Nicholas Rossolillo: Yeah. Just real quick. I do think it is going to be slightly different, but I thought that for a while now, and we have talked about this. ProShopGuy, I think you've asked us a couple of times. It really depends on the chip company too. Some chip companies have very little in the way of boom-bust cycle. It's dependent on their business model. Like AMD (AMD -4.54%) has hardly hiccuped for five years now versus Micron (MU -4.23%).

Micron is a manufacturing company. It's a completely different part of the semiconductor industry so it's a different business model. It still goes through a much steeper boom-bust cycle than most chip stocks will as a result. However, even Micron, the last bust was pretty severe because it was the trade war and then also the pandemic on top of that, but their net losses were pretty shallow for a couple of quarters. 

It depends on the chip company. We just have to remember this has been going on for decades now but we've reached a certain point where chips have reached a certain level of usefulness and a certain level of cheapness where they are now proliferating throughout the economy. Prices will decline over time, even for high-end chips, and will eventually bottom out.

Every chip type eventually finds a price bottom. But usage of those chips is proliferating such that it always outpaces the declines in price for new technological breakthroughs so that will continue to play into this boom-bust cycle for at least the next decade. Given the rate of proliferation of chips throughout the whole economy, I do think the boom-bust cycle is going to be different from here on out.