Even in Unprecedented Times, Semiconductors Have Continued to Perform
It is essential to highlight that multiple expansions have fueled much of the performance of Semis over recent years. A less accommodating Fed could affect multiple expansions. In contrast, data would suggest that the SOX index outperforms during periods of rising rates, likely a function of Semis' historically pro-cyclical bias.
While we respect cyclical trends, we choose to emphasize structural shifts – the rising cost of capacity, consolidation, performance-hungry apps, and governmental recognition of Semis' strategic value. There are fewer companies with the IP and scale to produce silicon, and those that are able will continue to appreciate. The "Mom, Baseball, Apple Pie" thesis still resonates – addressing the world's most consequential challenges requires more, not less, silicon.
Semis peaked in 2000 at ~4% of global market capitalization and troughed in 2015 at ~1.5%. Semis are currently ~3% of global market capitalization. Per capital consumption of energy has been flat since 1990, per capita consumption of chips has increased 6-fold – energy is still >6% of global market capitalization.
A likely "normalization" of the cycle is expected. After bottoming at 23% and starting CY21 below trend, Semi units enter CY22 roughly on-trend. The average upturn is ~20 months, with the longest ~30 months. Cycles end with time and rising capex, and the current upturn is presently in month 17.
In addition, while WFE (Water Fabrication Equipment) has increased 150% over the past five years based on secular drivers, growth in CY21 is the fastest since CY04 and is worth watching. Lastly, Supply Chain DOIs (Digital Object Identifiers) bottomed in C4Q20, and historically Semi stocks peak 4-6 quarters after DOIs trough.