Technology · Semiconductors
Peak vs Mid-Cycle Margins for Chip Companies
A terminal year at peak margin overstates value. Filed margin swings and a worked mid-cycle example on a fictional chip company.
Selborne Research · Semiconductors coverage: 9 guides, 6 company profiles, a primer and Excel model
Educational analysis. This guide is not investment advice or a recommendation to buy or sell any security, and it is not personalised.
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A Peak Year Is a Poor Perpetuity
Chip gross margins move with utilisation, inventory and bit prices. Strike a terminal value on the last year of a boom and you capitalise a rate the industry does not sustain. Average margin and capital intensity across one full cycle, and put that mid-cycle free cash flow in the terminal year.
Filed Margin Swings Across the Cycle
| Company | Low gross margin | High gross margin | Span |
|---|---|---|---|
| Micron | -9.1% (FY2023) | 80.7% (FY2026) | 89.8 points |
| Intel | 32.7% (FY2024) | 62.3% (FY2017) | 29.6 points |
| Texas Instruments | 57.0% (FY2025) | 68.8% (FY2022) | 11.8 points |
| TSMC | 46.0% (FY2019) | 59.9% (FY2025) | 13.9 points |
Spans are arithmetic from the filed endpoints shown. Micron is the memory extreme: bit supply and bit demand reprice the whole income statement. Intel shows a leading-edge integrated maker’s margin falling over several years. TSMC and Texas Instruments move less in percentage points but still enough that a single year is a poor perpetual assumption.
Nvidia’s filed swing is also material: gross margin 56.9% in FY2023 after inventory and commitment charges, against 75.0% in FY2025. The inventory cycle is the mechanism behind that designer case.
Why Capital Intensity Must Be Averaged Too
Margin alone is not enough. A foundry or integrated maker that spent a third of revenue on plant in the boom may spend less in the trough while depreciation from prior spend still sits in cost of goods. Mid-cycle free cash flow needs mid-cycle reinvestment as well as mid-cycle margin. Fab utilisation shows how fixed depreciation turns a few points of wafer loading into a sharp margin move.
Hardware companies face a parallel normalisation problem when PC and phone units peak; see mid-cycle margins for hardware companies.
Worked Example on a Fictional Memory Maker
Take a fictional memory company whose gross margin across a five-year cycle runs about 46%, 52%, 30%, -10% and 28%. The simple average of those five years is 29.2%. Capex runs at 30% of revenue through the path.
If a model treats the 52% year as the terminal margin and keeps 30% capital intensity, it capitalises a peak that the cycle average does not support. Using roughly 29% gross margin (and the same capital intensity averaged through the cycle) as the mid-cycle run rate is the correction.
How to Set the Terminal Margin
- Collect gross margin (and operating margin if you use it) for at least one full cycle from the filings.
- Average those years; do not drop the trough.
- Average capital intensity on the same window.
- Put mid-cycle free cash flow in the terminal year, not the final explicit year’s reported margin.
Days of inventory and memory pricing tell you where in the cycle the latest filing sits. The mid-cycle number is what you take forward once you know that.
Mid-cycle margin and capital intensity set the terminal free cash flow; the primer strikes value on that average, not on the final boom year.
- 17 sections, from the business models and the industry cycle to capital intensity, memory, inventory, equipment orders, stock pay and a reverse DCF
- 44 pages
- a chip designer, a foundry, a memory maker and an equipment maker, all fictional
- 4 worked valuations
- listed chip companies on filed margins, capital intensity, inventory days and stock pay, each with its fiscal year
- 6-company screen
The Excel model is the primer's through-cycle DCF live across 13 sheets: a chip designer, a foundry, a memory maker and an equipment maker, all fictional, plus a column for a company of your own in any of five business-model modes. Each mode turns the industry cycle into revenue its own way: units and selling prices, capacity times utilisation times revenue per wafer, bit demand against bit supply, orders and installed-base services, or wafer starts for a materials supplier. Depreciation sits in cost of goods for fab owners, capacity arrives two years after the capex that pays for it, and the terminal value is struck on mid-cycle cash flow. A reverse DCF reads the margin and the growth a price requires, and the sensitivity grids re-run the model in every cell.
See what's in the Semiconductors Sector Primer →£25 PDF · £59 with the Excel model · £159 for all three Technology industries
Frequently Asked Questions
- What is mid-cycle margin for a chip company?
- The average gross or operating margin across one full industry cycle, not the margin in the latest boom or bust year. Terminal value is struck on mid-cycle free cash flow so a peak year does not set the perpetual rate.
- How wide can chip gross margins swing?
- In the filed histories on this page, Micron moved from -9.1% gross margin in FY2023 to 80.7% in FY2026. Intel moved from 62.3% in FY2017 to 34.8% in FY2025. TSMC moved from 46.0% in FY2019 to 59.9% in FY2025.
- Why not use the latest year as the terminal margin?
- A terminal year struck at a peak overstates value if the business must live through the next downturn. Averaging margin and capital intensity across one full cycle avoids that trap.
- Does hardware use the same mid-cycle idea?
- Yes in spirit: normalise through the equipment and demand cycle rather than treating a peak year as perpetual. The hardware version is in the companion guide on mid-cycle margins for hardware companies.
Read next
The Semiconductor Inventory Cycle
Chip revenue swings harder than end demand because customers build and drain inventory. WSTS history, Nvidia charges and Texas Instruments capacity.
Days of Inventory by Chip Company
Ranked days of inventory for six chip filers from year-end balances, with DSO, DPO and fiscal year. Business model explains most of the spread.
The Memory Pricing Cycle
DRAM and NAND are priced on bit supply against bit demand, so margins swing furthest. Micron filings show the trough and the peak.
Fab Utilisation and Gross Margin
Depreciation is fixed, so a few points of utilisation move gross margin sharply. TSMC billing utilisation and Intel margin decline as worked cases.
Mid-Cycle Margins for Hardware Companies
A single year misleads for a cyclical hardware maker. How to average gross margin across a full cycle, with Seagate FY2016-FY2026 as the worked case.
See it applied
These company profiles apply the concepts from this guide to real public companies.