Bets on chip stocks are never easy to place. Like producers of any commodity, semiconductor companies face a volatile and high-pressure pricing environment. Complicating matters, a chip firm’s market position can be easily threatened by upstart competitors with better technology.
The flip side to this is that the Philadelphia Semiconductor Index is at 467–down 11% since the end of 2001–and a long way from its two-year high of 1281. So now might be the time to think about taking a chip shot or two. As for where to look for candidates, consider microchip companies with significant exposure to the cellular phone market.
Why chips for phones? In a word: demand. Next generation wireless services, known as 2.5G and 3G, are either already in place in the U.S. or set to roll out in the next year or two. For better or worse, the handsets for these services will let users perform more complicated tasks, such as transmitting video and Web browsing. Accordingly, they will require more memory and more chips to provide the computing power.
“The growth in 2.5G and 3G cell phone business will be a driver for many chip companies,” says Manoj Nadkarni, founder and principal analyst for Chipinvestor.com, an online newsletter devoted to the semiconductor business. As with all investing in microchip stocks, Nadkarni advises investors to stay mindful of each company’s specific expertise, as well as its market share within that particular segment.
Texas Instruments’ expertise is in digital signal processors (DSP). These microprocessors allow people to have conversations over digital networks by converting analog signals, like the human voice, to digital ones and vice versa.
According to Forward Concepts, a Tempe, Ariz.-based market research firm, Texas Instruments held 43.5% of the DSP market in 2001. That share slipped somewhat from 2000, yet still handily outdistanced Lucent Technologies’ former subsidiary Agere Systems, the nearest competitor, which had 16% of the market last year.
Judging by its copious research and development spending, Texas Instruments seems determined to hang onto its share of the DSP business. Last year, the company shelled out $1.6 billion for research and development, down from 2000 but well above 1999 levels.