2010 - The Year In Chips

While the semiconductor space has fragmented into many sub-sectors that have relatively less correlation with each other, the fact remains that 2010 was still a pretty strong year for chips. Worries about the strength and persistence of the economic recovery and the computer sector weighed on some stocks, but most companies benefited from customers replenishing their inventories throughout the first nine months of the year. 

As is often the case, investors traded these stocks on the basis of guidance and worries that the sector might have peaked in 2010. This is a battle that will be resolved in 2011. The question is whether 2010 was the high water mark in the chip recovery, or is the first half of 2011 just a pause in an overall upward trend and longer recovery cycle?

Smart? Very Smart
The torrid growth of smartphones, and the introduction of tablets, feels like one of the most significant factors for chip stocks in 2010 and going on into 2011. Companies like Broadcom (Nasdaq:BRCM), ARM Holdings (Nasdaq:ARMH) and Atmel (Nasdaq:ATML) saw their stocks do exceptionally well as investors paid up for their exposures to this consumer segment. Conversely, Qualcomm (Nasdaq:QCOM) and Maxim (Nasdaq:MXIM) failed to outperform even though both companies are highly leveraged to these markets. (For more, see The Chips Are Down.)

Networking Paid Off This Year
Within the overall positive performance of chips in 2010, companies leveraged to networking did exceptionally well. Broadcom double-dips here (with the smartphone space), while purer plays like Cavium (Nasdaq:CAVM) and Mellanox (Nasdaq:MLNX) had exceptional years. With ever-greater demands on networks and increasing functionality in chip sets, it looks as though this sub-sector could see another good year of demand from customers like Juniper (Nasdaq:JNPR), F5 (Nasdaq:FFIV) and the like.


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