It's been a wild ride the past few months in the semiconductor world. After peaking on Feb. 18, the widely watched Philadelphia Semiconductor Index fell more than 14% in less than a month before clawing back some recent gains.
But even though the Philadelphia Semiconductor Index is widely regarded as a bellwether in the field, nearly 57% of its market capitalization is controlled by just three blue-chip companies: Intel
Everybody hates mobile
Since hitting bottom, one submarket that's struggled mightily is mobile -- specifically, companies associated with radio frequency (RF) or tablet exposure. Here's a look in at how a list of these companies have performed in that time.
If you're getting lost in that spaghetti maze of crashing stock prices, the takeaway is that before an uptick in the past week, all of these stocks were down by more than 20% since the Feb. 18 index peak. Even after those strong gains in the past week, all these stocks still lag the index, while bellwether Intel is outperforming.
Sell! Sell! Sell!
Of course, there are also stocks that generally saw fast-paced run-ups in the latter half of 2010. To cherry-pick one time frame isn't entirely fair. However, I do believe that recent performance, along with general media sentiment, points toward investor nervousness about mobile in general; there's a growing fear that too much noise has been made about the field and that growth rates will tighten. That's a recipe for outsized sell-offs in rattled markets such as the ones we saw in the midst of the Middle East instability and the Japanese earthquake.
Buy! Buy! Buy!
Don't be fooled, though: That mindset is a mistake. Mobile stocks have plenty of growth left in them and are far more affordable than most other areas of technology. One only needs to look at Apple'srecent earnings report, or the stunningly strong average selling prices that Qualcomm reported on mobile devices, to get a beat on the continued strength of smartphones in particular.
That's great news for the RF industry. After falling more than 30% since Feb. 18, Skyworks
The key takeaway is that amongst these big three, while other business areas may be opaque, the sell-through on mobile devices is strong.
Understanding the opportunity
That's important, because at least for me, their strong relationship to mobile is the driving factor behind recommending RF stocks. In increasingly advanced smartphones that are constantly connected to data towers, the need for high-performance, small-footprint RF solutions only grows. More to the point: As these phones connect to 2G, 3G, and 4G networks, the content opportunity and complexity grows with every step. Perhaps in two or three years, the field will experience more price competition as products become more commoditized, but right now advances are moving at breakneck pace, and advanced RF content can be a strong differentiator.
Cheap? No. A good market? Yes.
Looking ahead, I don't find the RF industry to be cheap by any means. The three companies I mentioned earlier trade for about 14 to 18 times their adjusted earnings estimates for this year. That could be considered a fairly high value if you think the heavily cyclical semiconductor industry is nearing a peak. However, all three companies are levered to a mobile market that should keep posting strong growth even if other semiconductor end markets such as PCs start slowing. In a tech market where every "deal of the day" site that pops up seemingly gets a quick billion-dollar valuation, a P/E in the teens for a group of strong companies in lockstep with the smartphone boom is something I can get behind. Seems to me, panicky investors are abandoning the wrong growth markets.
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