## PART XV - SECTOR PLAYBOOKS | MODULE 072 # Semiconductors Analyst Playbook > Mission. Build a sector-specific research system for Semiconductors that converts operating data into financial outcomes, highlights the accounting areas most likely to distort comparability, and selects valuation methods that reflect the sector's economics. ## Economic engine and binding constraints Model units, wafer starts, die size/yield, node mix, ASP, utilization, inventory, and customer/channel inventory. Separate design-win timing from revenue conversion and stress utilization-driven gross margin. ## Primary KPI stack | KPI | Construction / analyst control | | --- | --- | | wafer starts | Number of wafers entering fabrication during the period; reconcile owned-fab, foundry, node, and wafer-size mix before comparing companies. Validation: Recalculate independently from cited source data; verify definition, period, units, scope, signs, and any reconciliation to reported financial or operating totals. | | units | Physical units shipped, sold, or produced for the defined product scope and period; reconcile returns, channel inventory, and product mix. Validation: Tie physical/operating units to company disclosures or source-system data; reconcile beginning/ending populations where applicable and test scope, ownership, and period consistency. | | ASP | Revenue attributable to the relevant product family divided by units sold/shipped, adjusted for rebates, mix, and channel treatment. Validation: Recalculate price/cost from underlying dollars and physical units; test mix, rebates, FX, timing, and unit-definition effects; reconcile to reported revenue or expense. | | utilization | Actual productive output or occupied capacity divided by practical available capacity after planned downtime, yield loss, and maintenance constraints. Validation: Recalculate from same-scope numerator and denominator; confirm period, units, cohort/geography, and issuer definition; reconcile material differences to filings or operating data. | | inventory days | Inventory days = average inventory / COGS x days in period | | book-to-bill | Book-to-bill = bookings / recognized revenue for the same definition and period | | design wins | Customer platforms/programs formally awarded or qualified during the period; track expected lifetime revenue, production start, and conversion to shipments. Validation: Recalculate independently from cited source data; verify definition, period, units, scope, signs, and any reconciliation to reported financial or operating totals. | | node mix | Share of wafer starts, revenue, or units produced on each process node; use the same denominator across periods and peers. Validation: Recalculate from same-scope numerator and denominator; confirm period, units, cohort/geography, and issuer definition; reconcile material differences to filings or operating data. | ## Sector-specific accounting and comparability traps - Inventory reserves: reconcile issuer treatment with peer treatment and quantify the effect on reported growth, margin, cash flow, capital, or valuation before comparing outputs. - Customer concentration: reconcile issuer treatment with peer treatment and quantify the effect on reported growth, margin, cash flow, capital, or valuation before comparing outputs. - Channel inventory: reconcile issuer treatment with peer treatment and quantify the effect on reported growth, margin, cash flow, capital, or valuation before comparing outputs. - Capital intensity: reconcile issuer treatment with peer treatment and quantify the effect on reported growth, margin, cash flow, capital, or valuation before comparing outputs. - Government incentives: reconcile issuer treatment with peer treatment and quantify the effect on reported growth, margin, cash flow, capital, or valuation before comparing outputs. ## Valuation frameworks - Through-cycle P/E: equity value divided by normalized cycle-average EPS, with peak/trough margins, working capital, credit, and capital spending normalized. - EV/EBITDA: enterprise value divided by normalized EBITDA; adjust leases, pensions, minorities, recurring restructuring and capital intensity before peer comparison. - FCF yield: normalized levered free cash flow divided by equity value; reconcile SBC, working capital, maintenance capex, taxes, and cycle before comparing companies. - Replacement-cost context: estimate current cost to recreate productive assets/capacity, adjust for age, technology, location, permits, and time-to-build, then compare EV with replacement value. - DCF: forecast FCFF from operating drivers, discount at a capital-structure-consistent WACC, model terminal growth/ROIC coherently, and bridge enterprise value to common equity. ## Sector diligence questions - What is the most important leading indicator for Semiconductors, and how many months does it lead reported revenue or cash flow? ## Sector stress and falsification - Stress wafer starts and units together in the direction most likely to break the equity story; flow the result through working capital, capex, liquidity, financing, dilution, and valuation. - Explicitly test inventory reserves. Determine whether it can make the reported sector comparison look better or worse without equivalent economic change. ## 99-point standalone execution extension ### Model architecture and forecast chain Model units, wafer starts, die size, yield, ASP, node mix, utilization, packaging/test, and inventory across end markets. Separate fabless economics from foundry and IDM capital intensity. ### Leading-indicator dashboard Track book-to-bill where meaningful, lead times, distributor inventory, foundry utilization, equipment orders, memory pricing, design wins, product qualification, and customer capex. ### Primary-source map SEC filings; foundry and equipment-vendor filings; Semiconductor Industry Association and WSTS industry data; U.S. Commerce/BIS rules; customer capex and inventory disclosures. ### Accounting normalization test Channel inventory, customer concentration, purchase commitments, capitalized manufacturing cost, government incentives, and rapid obsolescence can distort cycle signals. ### Valuation implementation Use mid-cycle earnings, DCF, EV/EBIT, and FCF yield with normalized utilization and capex. Peak-cycle low multiples can be value traps. ### Worked numerical mini-case > Illustrative utilization case. A fab has 100k wafer starts/month, 82% utilization, $2,400 revenue per utilized wafer and 48% gross margin. If utilization falls to 68% with fixed conversion cost unchanged, model both the 17% shipment decline and the margin de-absorption rather than cutting revenue alone. The investment conclusion should separate cyclical utilization recovery from structural node/share loss. ### Monitoring and falsification cadence Key breaks include architecture displacement, node or packaging disadvantage, customer insourcing, excess capacity, and product cycles that fail to convert design wins into volume. At every quarterly update, rebuild the driver bridge from operating units to revenue, margin, cash flow and valuation; compare leading indicators with the prior forecast; record definition changes; and precommit the threshold that would trigger a thesis reset rather than a cosmetic estimate change. ## Sector exit standard The Semiconductors work is complete only when the analyst can explain the business in its native operating units, reproduce the KPI history, identify the binding growth constraint and marginal price setter, normalize sector-specific accounting, quantify a coherent adverse case, and translate the current market price into the operating expectations that must be met or exceeded.