Semiconductor chips are essential to modern life, as they are the “brains” that power everything from smartphones to iPads to cars, communication networks, and household appliances.
However, despite their importance to the global economy, the cyclicality of the semiconductor industry can make it challenging for investors to navigate. As this chart shows, global semiconductor orders are highly volatile, oscillating between multi-year peaks and troughs. The most recent peak in semiconductor orders occurred in August 2017, when they were up 44.7% year-over-year. Since then, orders have been trending down, to a recent -24% year-over-year decline as of January 2019.
In fact, this has been one of the worst yearly order declines outside of recessions since 1987. We think orders are nearing a trough – and judging by the information we have gleaned from a wide variety of recent industry earnings calls, corporate management teams seem to agree. Many are calling for semiconductor industry conditions to improve within the next 1-2 quarters. In previous cycles, investors have been much better served to invest when orders are troughing rather than when they are peaking.
