Consumer Electronics Steer Chip Sales Growth

Updated from 12:23 p.m. EST

Category 5 hurricanes and $3-a-gallon gasoline can't stop consumers from buying electronic devices.

Sales of chips used in notebook computers, MP3 players and digital televisions reached $227.5 billion in 2005, up 6.8% from 2004, according to a new report from the Semiconductor Industry Association.

Semiconductor sales in December were down 2.2% from November, in line with seasonal patterns but up 8.6% from a year earlier to $20 billion.

"Despite record energy prices and an unprecedented series of natural disasters, worldwide demand for semiconductors increased in all markets," George Scalise, the president of the Semiconductor Industry Association said in a statement accompanying the group's report. The growth in 2005 was broad based, Scalise said, although consumers rather than corporations were the main drivers of the chip sector's growth.

As in previous months, flash memory was the chip industry's superstar, boasting the highest growth rates. In 2005, sales of flash memory grew 18.9%, to $18.6 billion.

Apple's(AAPL - Cramer's Take - Stockpickr) decision to use NAND flash instead of miniature hard drives in their iPods created a major new chunk of demand for flash memory, said Scalise, while the popularity of digital cameras and cell phones all contributed to flash's phenomenal growth rates.

Microprocessor revenue reached $35 billion in 2005, up 14.7% from 2004. Logic chip sales grew 16.7%. Revenue of DRAM memory chips, hurt by a supply glut and plummeting prices, fell 4.7% in 2005.

Sales to personal computers, the largest single market for chips, grew 17% by unit shipments in the fourth quarter of 2005 compared to the year before.

SIA forecasts that worldwide chip sales will grow 7.9% in 2006, to $245 billion. First-quarter sales are expected to change plus or minus 1% sequentially.

Excess inventory levels in the electronics supply chain were negative for the third and fourth quarters of 2005, according to the SIA. Lean inventories among the companies that purchase chips mean that they are likely to buy more chips in the near future rather than working off existing stockpiles.

"The industry really does seem to have focused on inventory monitoring and done a much better job of understanding how much inventory is out there," said Tom Smith, a semiconductor equities analyst for Standard & Poors.

Following the recent round of earnings calls from chip firms, Smith raised his outlook for the industry to positive from neutral, forecasting 12% growth in 2006, compared to his previous estimate of 9%.

Among the companies factoring into Smith's bullish outlook is Micrel(MCRL - Cramer's Take - Stockpickr), which reported Wednesday that it nearly doubled is quarterly profit year over year. The San Jose, Calif., chipmaker projected stronger-than-expected first-quarter sales based on its backlog.

Although Intel(INTC - Cramer's Take - Stockpickr), the world's largest chipmaker, reported disappointing results last month, a slew of other chipmakers, including LSI Logic(LSI - Cramer's Take - Stockpickr)and Advanced Micro Devices(AMD - Cramer's Take - Stockpickr), outperformed the Street's expectations.

The Philadelphia Stock Exchange Semiconductor Sector Index, which is up 15% in 2006, declined 1.1% in midday trading Thursday.