Why the Chip Business on the Upswing’s a Great Sign for the Economy

By Mitchell Clark, B.Comm. — Ahead of the Street column

One of the best signs for the economy is the strength being shown in the semiconductor chip industry, and Intel Corporation (NASDAQ/INTC) is leading the way. The company’s latest numbers were very good and the stock has been doing very well, particularly over the last couple of months. Intel is one of my benchmark stocks that I follow on a weekly basis. This company is important to follow, because its business provides a clear measurement of what consumers are spending their money on. Intel now supplies most of Apple’s (NASDAQ/AAPL) computer chips, so the company is literally at the heart of virtually the entire technology business.

Not surprisingly, this stock did incredibly well during the technology bubble in the 1990s. Ever since then, though, the stock’s slowly trended downward and lost about half of its value during the recent financial crisis. Only now is Intel experiencing renewed enthusiasm from investors. In my mind, the stock would have to pass the $30.00-per-share level in order for it to be considered as having broken out of its decade-long decline. Currently, the shares are trading around the $24.00 level.

What Intel says about its business provides a good read on consumers’ purchasing power in the technology industry. In the first quarter, business was good. But, there are other, smaller semiconductor companies that are also doing well and this means that spending at the wholesale, industrial level in the technology industry is improving.

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One such company that illustrates the positive trend is Cavium Networks, Inc. (NASDAQ/CAVM). This company makes semiconductor chips that are used in electronic equipment that facilitates video, voice and data transmission at high speeds. The
company sells directly to the manufacturers of networking, wireless and consumer electronic equipment.

In its latest quarter, Cavium saw its revenues climb over 100% to a record 42 million dollars. The company experienced a sequential revenue increase of 30% and the business is just about to achieve profitability with strong margins and record bookings for the future.

This company is saying that business is strong and getting better. It’s a good sign for the industry and for the economy. In my mind, it also shows that the technology sector will continue to be one of the strongest industries this year. Already, large-cap technology stocks have put in a tremendous performance and I think this trend will continue.

It seems like there’s a new business cycle developing and it’s beginning in technology. The semiconductor business is the perfect place for it to start, because computers chips are in a lot of products, such as cars, phones, computers, consumer electronics, and so on. Pull up a five-year chart on the NASDAQ and you’ll see just how close that index was to making a full recovery before it broke down in 2008. The broader market is certainly due for a correction and, when it happens, a good buying opportunity should present itself in the technology sector. Just owning the index seems like a solid play. One of the best signs for the economy is the strength being shown in the semiconductor chip industry, and Intel Corporation (NASDAQ/INTC) is leading the way. The company’s latest numbers were very good and the stock has been doing very well, particularly over the last couple of months. Intel is one of my benchmark stocks that I follow on a weekly basis. This company is important to follow, because its business provides a clear measurement of what consumers are spending their money on. Intel now supplies most of Apple’s (NASDAQ/AAPL) computer chips, so the company is literally at the heart of virtually the entire technology business.

Not surprisingly, this stock did incredibly well during the technology bubble in the 1990s. Ever since then, though, the stock’s slowly trended downward and lost about half of its value during the recent financial crisis. Only now is Intel experiencing renewed enthusiasm from investors. In my mind, the stock would have to pass the $30.00-per-share level in order for it to be considered as having broken out of its decade-long decline. Currently, the shares are trading around the $24.00 level.

What Intel says about its business provides a good read on consumers’ purchasing power in the technology industry. In the first quarter, business was good. But, there are other, smaller semiconductor companies that are also doing well and this means that spending at the wholesale, industrial level in the technology industry is improving.

One such company that illustrates the positive trend is Cavium Networks, Inc. (NASDAQ/CAVM). This company makes semiconductor chips that are used in electronic equipment that facilitates video, voice and data transmission at high speeds. The
company sells directly to the manufacturers of networking, wireless and consumer electronic equipment.

In its latest quarter, Cavium saw its revenues climb over 100% to a record 42 million dollars. The company experienced a sequential revenue increase of 30% and the business is just about to achieve profitability with strong margins and record bookings for the future.

This company is saying that business is strong and getting better. It’s a good sign for the industry and for the economy. In my mind, it also shows that the technology sector will continue to be one of the strongest industries this year. Already, large-cap technology stocks have put in a tremendous performance and I think this trend will continue.

It seems like there’s a new business cycle developing and it’s beginning in technology. The semiconductor business is the perfect place for it to start, because computers chips are in a lot of products, such as cars, phones, computers, consumer electronics, and so on. Pull up a five-year chart on the NASDAQ and you’ll see just how close that index was to making a full recovery before it broke down in 2008. The broader market is certainly due for a correction and, when it happens, a good buying opportunity should present itself in the technology sector. Just owning the index seems like a solid play.