Summary - The semiconductor industry, like many others, goes through good times and bad times (although it seems like it has had a bias recently for more bad than good). This cyclicality makes it difficult to get a company funded during bad times, and it can lead to false hopes during good times. This blog entry shows the range of valuations between the good and bad times and demonstrates that GPM is probably the second most important metric for growing a business (behind growth rate).

Data - The plot that follows looks at a variety of semiconductor companies, including mixed-signal companies (LTC, MXIM, SLAB), big semiconductor companies (TI, NXP), and a few power chip companies (IXYS).

Plot - The relationship between Price to Sales ratio versus GPM% is shown on the figure below. The significant point is that the slope of the line is almost 10x GPM% during bad times, and 20x GPM% during good times.

Conclusion - The bottom line is that anything a company can do to offer higher GPM products is really worth it. When we get back to good times, for each 10% increase in GPM, the value of the company goes up by about 2x!