Hot Growth: The Chips Have It

Four of the top 10 companies in our annual Hot Tech Growth 75 are involved in the manufacture of semiconductors. What's behind their banner year?

by Arik Hesseldahl

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Companies connected to the chip sector have been among the biggest drivers of technology industry growth in 2007. Four of this year's 10 fastest-growing tech companies manufacture semiconductors or the materials used to make them, according to a ranking of companies with the fastest gains in share price, sales, and profits and the largest returns on equity.

Cypress Semiconductor finished fourth, after Google (GOOG), AT&T (T), and Apple (AAPL), in BusinessWeek.com's annual Hot Tech Growth 75 ranking. Nvidia, MEMC Electronic Materials, and Varian Semiconductor Equipment Associates claimed the sixth, seventh, and eighth spots, respectively.

Pass the Chips, Please

What puts so many chipmakers and their suppliers at the top of the heap? Demand for chips is up, fueled by robust purchases of personal computers and mobile phones. PC shipments are expected to finish the year 13% higher than in 2006, according to researcher Gartner (IT), and consumers are expected to buy as many as 1.1 billion wireless phones, up 13% from the 990 million sold last year, says research firm iSuppli.

Competitive pricing among some of the industry's biggest players, including Intel (INTC), Advanced Micro Devices (AMD), and Texas Instruments (TXN), kept them out of the upper growth ranks.

Instead, some of the biggest beneficiaries are the smaller companies that supply the highly specialized, crucial materials needed to build chips. Consider silicon, one of a chip's most basic components. One of the prime suppliers is MEMC Electronic Materials (WFR), based far from Silicon Valley, in St. Peters, Mo., about a 30-minute drive from St. Louis.

MEMC Rides the Roller Coaster

Spun off from Monsanto (MON) in 1959, MEMC seemed little more than a footnote to the heady boom-and-bust cycles that marked the semiconductor sector in the mid-1990s. As chipmakers such as Intel and Texas Instruments ramped up production to meet the needs of PC and cell-phone makers, they needed more and more of MEMC's silicon wafers, the dinner-plate-size discs from which individual chips are made. As chip manufacturing surged, MEMC's revenues soared, from $552 million 1993 to $1.1 billion in 1996.

The bust came just as suddenly. After overestimating demand, MEMC's fortunes took a nosedive in 1997, and sales fell for six straight years, bottoming out at $687 million in 2002. "The wafer industry was just a train wreck during those years," says analyst Paul Leming of Soleil-Princeton Tech.

Enter Nabeel Gareeb, who, after a 10-year stint at International Rectifier (IRF), joined MEMC as chief executive in 2002 and quickly set about repairing a business model he describes as "badly broken." Gareeb says when he took the job, every dollar MEMC spent on capital expenditures returned only 60¢ in revenue. "We needed gross margins of more than 50% just to break even, and it just wasn't working," he says. Today a dollar spent on cap expenditures at MEMC yields $1.50 in revenue.

The Sun Shines on MEMC

Gareeb's arrival at MEMC was timely: Turns out the polysilicon used in chip wafers also is used in solar panels, which have been in high demand recently, spurred in part by government subsidies in Germany and Japan (BusinessWeek.com, 9/7/06). Demand for silicon is as high now as it's ever been. Spot prices for a kilogram of polysilicon (or simply "poly," as insiders call it) averaged $10 in 2000, but top $200 now.

Gareeb says solar-related business now accounts for nearly 20% of MEMC's sales. On Oct. 25 the company announced a 10-year deal worth more than $7 billion to supply wafers to German solar-power concern Conergy.