Semiconductor bulls have received a couple of bits of encouraging news in recent days. On April 10, semiconductor foundry Taiwan Semiconductor (NYSE:TSM) announced that it saw an uptick in sales during the month of March. Sales rose 7.7% from February after declining month after month beginning last July. Furthermore, market research firm iSuppli recently announced that excess global semiconductor inventory has fallen by 40% from its high during the third quarter of 2006. Do these two data points mean that the semiconductor market is about to strengthen?
Sorry to disappoint you, but I don't really know. Despite the improvement at TSMC, the year-over-year comparisons still look poor -- March sales were down by 19% from last year. And with the consumer being responsible for more than 50% of semiconductor consumption, a lot depends on the economy and the effect of the ongoing housing/mortgage meltdown.
What I do know is that there are some strong trends driving this business that should remain in place for quite awhile.
During 2006, fabless semiconductor companies (those that don't do any of their own manufacturing) were responsible for 20% of worldwide chip sales, up from just 10% during the year 2000. Obviously, fabless companies are growing faster than the market -- on the whole they registered 16% growth last year, compared to just 9% growth for the semiconductor market in total.
In addition, many companies are making the decision to cut back on their investments in manufacturing facilities and are utilizing a "fab-light" strategy -- letting the specialists like TSMC, United Microelectronics (NYSE:UMC), and Chartered (NASDAQ:CHRT) handle a portion of their manufacturing. This even includes large companies like Texas Instruments (NYSE:TXN). The advantage to a fab-light strategy for TI, besides the reduced investment requirements, is that it can keep its internal fabs more fully loaded. When a production decline is needed, it can cut back at its foundry partners instead of internally.
Although this will make TSMC's results volatile, and its sales haven't necessarily bottomed, I believe that it is attractive for investors with a long-term focus -- but you should convince yourself before joining me among the ranks of shareholders.
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Fool contributor Dan Bloom owns shares of Taiwan Semiconductor, but not of any other company mentioned in this article. The Fool has a disclosure policy.
