Don't Chase Growth Priced For Perfection: 2016 Semi Outlook

“When wireless is perfectly applied the whole earth will be converted into a huge brain, which in fact it is, all things being particles of a real and rhythmic whole. We shall be able to communicate with one another instantly, irrespective of distance. Not only this, but through television and telephony we shall see and hear one another as perfectly as though we were face to face, despite intervening distances of thousands of miles, and the instruments through which we shall be able to do all of this, will fit in our vest pockets.”     -- Nikola Tesla, 1926

The Electronic Components-Semiconductor industry keeps burning red hot.

The Zacks Industry Rank for this sizeable 39-company industry hit #35 out of 265 (that’s the top 13%), and was up +16 spots over the last week alone. Covering analysts for semi companies recently announced 12 positive EPS revisions versus just 3 negative EPS revisions.

What endure as EPS drivers for this industry?

Successful corporate strategies in this space aim at providing efficient and reliable use, while still keeping individual semi chips an economic purchase.

An array of semi chip solutions offer critical micro-technologic capabilities. They enable interconnected electronic communications, personal computers, servers, industrial sensors and touch screens.

The more thickly woven and sophisticated semi chip applications and IT interconnections become -- inside our homes and in business spheres -- the greater the semi chip volume growth.

However, significant risks come with buying shares in a semi chip company at this late stage of an economic cycle.

Briefly, the semi industry is highly cyclical. Adverse global demand conditions can dampen customer confidence and delay IT spending. This can lead to sharply reduced demand for semi products and higher pricing pressures.

Semi chip production is characterized by constant and swift technical change; rapid product obsolescence and price erosion; and evolving standards. That adds up to short product lifecycles. Continuous introduction of new semi products, and integration of outside semi acquisitions, burden semi companies with high operating expenses.

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