You don’t see them around you, but tiny machines called microchips are powering devices that surround you as you go about your daily life.
Whether you are setting the alarm on your smartphone, tracking your exercise routine through your Apple (NASDAQ: AAPL) Watch, or attending a Zoom (NASDAQ: ZM) meeting with your colleagues on your laptop, you’re tapping on the microchips to power your daily activities..
These microchips are powered by semiconductors, and demand for these products has exploded in the last decade since the humble smartphone was invented in 2007.
The global chip market is huge — a US$440 billion behemoth that is churning out billions of these microscopic machines back in 2020, according to the World Semiconductor Trade Statistics (WSTS).
Thing is, the pandemic has just accelerated this growth trend further as more people hop online to stay in touch with friends and family, and to shop online.
Can semiconductor sales continue to climb? Which companies stand to benefit from this trend?
Bumping up forecasts once again
Back in December last year, the WSTS was already upgrading its forecast for 2020 semiconductor growth to 5.1% from 2019’s level, up from its previous 3.3% guidance.
Looking into 2021, WSTS had predicted, at the time, that the industry size will hit US$469 billion for an increase of 8.4% year on year.
Note that this was already an upgrade from a previous forecast for a 6.2% growth rate.
By the time June 2021 came along, WSTS had revised its market outlook for 2021 sharply to US$527.2 billion, up nearly 22% year on year.
Part of the reason for the upgrade was due to a shortage of semiconductor chips as foundries could only increase their manufacturing capacity in 2022.
And just two weeks ago, with the actual figures for 2021’s second quarter just in, WSTS revised its forecast a third time.
It now believes the market will grow to US$551 billion this year, for a stunning growth rate of 25.1%.
Benefitting from the surge in demand
Companies that are producing electronic components or microchips for their clients stand to benefit from this projected growth.
One of these is Micro-Mechanics (Holdings) Ltd (SGX: 5DD), or MMH.
The group designs and manufactures tools and parts used in applications for the wafer fabrication and assembly processes of the semiconductor industry.
For its fiscal year ended 30 June 2021 (FY2021), MMH reported a 14.8% year on year increase in revenue while net profit jumped by 23.3% year on year to S$18.1 million.
Another beneficiary is UMS Holdings Limited (SGX: 558), which provides equipment manufacturing and engineering services to manufacturers of semiconductors.
For the first half of 2021 (1H2021), revenue surged by 55% year on year to S$116.4 million and net profit increased by 45% year on year to S$32.3 million.
Because of the good results, the group declared an interim dividend of S$0.01 and also a one-for-four bonus issue of shares.
Yet another company that may benefit is Frencken Group Limited (SGX: E28).
Frencken is an integrated technology solutions business that serves various industries, one of which includes semiconductors.
The group’s 1H2021 revenue rose 28.3% year on year to S$375.3 million, while net profit soared 67.2% year on year to S$31.3 million.
A structural growth trend
With the proliferation of smart devices and a push for the Internet of Things (IoT), the demand for semiconductors should stay buoyant for the foreseeable future.
The industry is now witnessing a structural growth trend that is set to persist.
Previously, the semiconductor industry was known to be notoriously cyclical as demand waxed and waned for microchips.
MMH has cited a forecast from VLSI research that global chip sales could double to nearly US$1 trillion by 2030, providing all players with attractive opportunities to expand their business further.
There is good enough reason to believe that this growth can carry on as chips become embedded in almost all aspects of our lives.
Advances in artificial intelligence, IoT and self-driving cars translate to even greater demand for all manner of chips, further fuelling the growth of this burgeoning industry.
Get Smart: Sales forecasts may be revised upwards again
We are currently at the halfway point of 2021 in terms of visibility for the semiconductor sector.
But what we are witnessing is already telling us that the growth experienced is not a one-trick-pony.
There are ample reasons to believe that the momentum can carry over into 2022 and beyond.
And being an investor in such an industry means you will be able to enjoy long-term share price appreciation as well as a growing dividend.
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Disclaimer: Royston Yang owns shares of Apple and Micro-Mechanics (Holdings) Ltd.
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