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Chips Are Cheap

There was a time when semiconductors were a growth-driven business. Money managers like Cramer always had these stocks in their portfolios. But the times seem to have changed, at least for now.

Throughout the 1990s, the semi industry grew at 13% a year. But since 2003, that rate’s dropped to 10%. Most chips are just commodities these days, meaning what was once proprietary tech is now easily made by any competitor. That’s why a company like National Semiconductor ends up reporting such a horrible quarter.

Just this morning (Friday), Nat Semi disappointed Wall Street by missing earnings estimates by a penny and revenues by $3 million. Bookings were down 7%, and the company offered less-than-enthusiastic guidance.

But analysts and investors are right to groan, Nat Semi Chairman and CEO Brian Halla told Cramer today. The rise of the semiconductor business grew right along with the mainframe, personal computer, Internet and has trailed off ever since. So before former buyers get back in, they need a reason.

Halla said his firm is working on that. Nat Semi research and development is spending money on developing products for chips that use less energy, as well as those for the healthcare and security and surveillance industries, three places where Halla predicts that next wave of growth will come from.

Solar energy is a focus, too. Nat Semi has been working with a university – who the CEO won’t say – to develop a device that bolts on to solar panels and improves its efficiency. So if debris is covering the panel or clouds have blocked out the sun, Nat Semi’s products “can bring back 40% to 50% of that energy,” Halla said, and “improve the efficiency of any solar ray by about 20%.”

Granted, carbon-based fuels are still more efficient than solar by about six times, Halla said. But “to a semiconductor guy, when you get that close, you’re there.”

“If any other industry had performed as well as the semiconductor industry in terms of cost performance benefits,” Halla said, “you could buy a Rolls Royce for 25 cents today.”

Halla also defended his handset business, even after Nokia Friday offered disappointing guidance. High-end chips for devices like smartphones are driving growth here, and business with Nokia is “pretty good.” Apple and Research in Motion are making their presences known in this space as well.

Halla emphasized the products he’d mentioned – healthcare, mobile devices, alternative energy – and how . All of these will require the services of an analog company like Nat Semi.

Regardless of what you think of the semiconductor business right now, Cramer’s point is that these stocks are inexpensive right now. Nat Semi’s trading at just 11 times earnings. So while there is no immediate catalyst on the horizon, at least you know this sector’s already found a bottom. And he’s confident that the company will beat its own guidance expectations.

“I can’t tell you to stay away from Nat Semi,” Cramer said. “It’s just too cheap. But the whole semiconductor group is darn cheap, too.”



Editor's note: A previous version of this post contained parts of the interview that never made it to air.

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