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Chips in a High-Stakes Poker Game

How to play the cycles in the chip foundry industry.

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Despite the current economic downturn, the long march of technological advancement continues. Electronic devices, from PCs to cell phones to digital cameras, are getting smaller, more powerful, and more energy-efficient. Most of this progress is driven by leading semiconductor companies that design the chips that power these devices. Advancements in chip design, however, are often enabled by advances in manufacturing technology. Thus, third-party chip foundries, which act as outsourced manufacturers for most semiconductor firms, are an integral part of the industry. Let's take a closer look at the major semiconductor foundries and open the playbook on how to invest in these companies.

Industry Overview
Semiconductor manufacturing is like a high-stakes poker game--the entry fee is high, the game changes quickly, and firms either keep up or get knocked out. Chip manufacturing is highly capital-intensive, as firms spend billions of dollars to set up new facilities, called fabs. Fabs require pristine settings that are free from vibrations, temperature changes, or even the smallest speck of dust. Meanwhile, the equipment used in chip fabrication is highly specialized, as these machines are designed to build semiconductors that include billions of transistors on a piece of silicon often smaller than a fingernail. Furthermore, the next wave of smaller, more powerful chips can only be built with the most advanced tools, so new equipment needs to be purchased with each technological transition.

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.