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Technology Stocks : Semi Equipment Analysis

SOXX 296.74

+1.8%

Nov 28 4:00 PM EST

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To: robert b furman who wrote (85450)	8/9/2020 1:35:58 PM
From: Sun Tzu	Read Replies (1) of 95487

Hi Bob, It is in the nature of cyclical industries to have huge upfront costs and huge incremental margins. A good example is the oil industry or mining. It takes a ton of money to explore and develop a new oil field or mine, but once you do, above a certain price it is almost pure profits. Think of the gold miners. Even the worst produces have a base cost of under $1400/Oz (the average is ~$900). So at today's prices they are all profitable. If gold ever becomes $3000/Oz, it may become feasible for someone to try to extract it from sea water. This characteristic of huge marginal profits is what pushes other players (including governments) into investing in the industry, often near the peak of the cycle (b/c that is when the profits are highest and a business case can be made easiest). Now if you look at the semi industry, it shares all these characteristics. Fabs cost huge amounts of money to build, and the pay offs are greater as the cycle expands. Furthermore, the demand is also cyclical adding more to the profit margin expansion and the incentive to invest in greater production capacity. That is until the capacity exceeds demand, which is often followed by the demand tanking on its own. What I am getting at is that there is no escaping the nature of the beast. It is even more obvious in the natural resources sectors - just take a look at long term charts of SP Oil subsectors. But its effect is there for all cyclical industries. There is just no way that a hot industry will not attract additional attention and investments. There is never going to be a time that Wall Street analysts will not project the high profits into infinity and not make a case for why they shares they are bringing public are not undervalued. What the semis have going for them so far is that there is not much in the way of new hot IPOs and excessive industry investments coming in - not yet anyway. But on the whole, they have done much worse than secular growth technology companies. And it doesn't matter which chip or semicap company you look at.

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