By DAVID ZEILER, Contributing Writer, Money Morning • January 20, 2016
The semiconductor stocks forecast for 2016 is going to sound familiar to anyone who follows the industry closely.
The wave of mergers and acquisitions (M&A) that started more than a year ago will continue in 2016. And sales growth in most, though not all, chip segments will slow.
That could mean more disappointing returns in the short term. Three years of steadily rising returns for semiconductor stocks ended in 2015, with the Philadelphia Semiconductor Index slipping 3.39% for the year.
And with the markets in turmoil, 2016 has started out with more losses. The index is off 13.44% so far.
According to the World Semiconductor Trade Statistics (WSTS), the silicon chip market was nearly flat in 2015, with growth of just 0.2% to $336 billion.
But WSTS also sees a reversal over the next two years, with semiconductor market growth of 1.4% this year and 3.1% in 2017. Segments like automotive tech and the "Internet of Things" – the ability of devices to interact with each other wirelessly — are expected to drive this growth.
Regarding mergers among the chipmaker stocks, it seems at least one deal is always swirling.
Top Semiconductor Mergers of 2015
Sources: Money Morning Staff Research
Atmel prefers Microchip's $3.42 billion offer pending a counterproposal from Dialog, which is not expected.
Last year, there were 23 M&A deals in the chip sector worth $119 billion total. In 2016, expect the merger mania to cool off a bit.
"We have been at a pace of about two deals a month," Mark Edelstone, managing director at Morgan Stanley Investment Banking, told MarketWatch. "I think things will slow down from that."
A maturing industry in need of some consolidation and cheap debt have fueled the deal-making.
"You will see the companies that deliver value be in a stronger position to command that value," Edelstone said. "This has been hard to do because you had too many competitors going after the same sockets, and that has been counterproductive."
The trend of consolidation is expected to reduce the total number of semiconductor companies by another 25% to 30%. That, combined with growth in demand driven by the explosion of the Internet of Things as well as demand for automotive chips, will help boost theearnings of most semiconductor stocks in 2016 and 2017.