4 tests for separating chip-cycle momentum from durable returns
Capacity headlines matter less than the relationship between utilization, pricing, cash conversion and customer concentration.
Semiconductor investment is measured in years, while product demand can turn within quarters. That mismatch makes discipline essential: a capacity plan is not yet proof of an economic return.
Four tests
- Capacity growth against expected utilization
- Pricing power across the product mix
- Cash conversion after capital spending
- Customer concentration and design durability
1. Utilization before volume
More capacity can support growth, but only if equipment is used productively. Utilization places shipment gains in the context of the asset base required to produce them.
2. Mix before average price
Average selling price can rise because the mix shifted to more complex products, because supply tightened, or because the company gained pricing power. Those causes have different durability.
3. Cash after capital spending
Accounting profit does not fund another fabrication plant. Free cash generation after necessary investment reveals whether growth is self-financing.
4. Customers and design life
A concentrated customer base can accelerate growth and increase risk. Contract structure, switching costs and product design cycles help explain whether revenue is repeatable.