Do semiconductor stocks have more room to run?

Inspired by Chat GPT and the upcoming AI revolution, semiconductor stocks have had a great 2023. Now at richer valuations, are there still opportunities in the chip sector?

We look at the roller coaster ride of semiconductor stocks in recent years, discuss the dynamics of supply and demand, inventory, and prices, examine the results of Asian semiconductor firms, and explore the largest US semiconductor companies along with the Van Eck Semiconductor ETF (SMH).

The backdrop for chip stocks

From the increasing adoption of artificial intelligence (AI) to the demand for advanced memory chips, the semiconductor market is well-positioned to grow over the coming years. According to Prophecy Market Insights, the semiconductor market is poised to achieve a high compound annual growth rate (CAGR) of 13.1% from 2022 to 2032. 

However, shorter-term drivers cannot be ignored when timing an investment.

The stocks led the bull market of 2020 through 2021 and tanked in 2022 as markets turned bearish. Now with broader stock indices churning sideways in 2023, semis have been a rare bright spot thanks to the excitement around AI and the implications it will have for the chips needed to power it.

Latest news: Asian semiconductor results

The Asian semiconductor industry boasts several major players influencing the global market. Among them are Taiwan Semiconductor Manufacturing Company Limited (TSMC), the world's largest contract chipmaker; Samsung Electronics, a diversified conglomerate manufacturing memory and logic chips; SK Hynix, a key producer of DRAM and NAND flash memory and Semiconductor Manufacturing International Corporation (SMIC), a leading semiconductor foundry based in China. These companies shape the industry, drive technological advancements, and cater to the increasing demand for electronic devices. 

TSMC's earnings per share increased by 2.1% compared to the previous year but fell by 30% on a quarter-over-quarter basis. Net sales also saw a decline from the previous quarter. TSMC expects its gross margin to contract in the upcoming quarter. 


SALA SINK on LinkedIn: Semiconductor sales continued to slip during the ...

Source: WSTS


As a group, earnings growth among semiconductor stocks decelerated over the past quarter. However, the results were mostly better than expected. This goes a long way to explain the slump in the share price last year, followed by a rally off the lows this year. If earnings continue to deteriorate, then the upside in the shares could be limited, however, if results continue to top expectations, chip stocks may have already bottomed.

Investing in semiconductor stocks: Upside potential

One of the key drivers of investing in semiconductor stocks lies in the exciting future of AI. AI industry leaders require hardware setups with significant processing power to meet the booming demand for AI-capable hardware and software. Silicon chips and semiconductors play a crucial role in enabling these advancements. Companies like AMD and Nvidia, with their powerful graphic processing units, empower AI innovators to push boundaries and achieve breakthroughs without encountering computational bottlenecks.

Another significant factor that can fuel semiconductor stocks is the implementation of the CHIPS and Science Act. Introduced by the Biden administration, this federal statute aims to bring semiconductor manufacturing to the US. By supporting American semiconductor companies, promoting investment in research and development, and incentivizing foreign direct investments, the act is expected to enhance US semiconductor production capacity while lowering prices for consumers. 

Furthermore, establishing a semiconductor manufacturing hub in the US would contribute to diversifying the global supply chain, mitigating the risk of future semiconductor shortages.

The risks of investing in chip stocks

Geopolitical tensions pose risks to the semiconductor industry, particularly the competition between the US and China for semiconductor supremacy. The tense relations between China and Taiwan have created a stranglehold on the chip sector. In response, the US introduced the CHIPS Act, demonstrating its determination to protect Taiwan's semiconductor factories.

The unresolved tension between these global superpowers has driven away some semiconductor investors and traders, who are waiting for geopolitical stability before reentering the market.

Falling demand is another risk factor impacting the semiconductor sector. Taiwan Semiconductors' latest Q1 earnings report revealed a decline in semiconductor demand. Although the company reported quarterly earnings exceeding market expectations, it lowered its industry outlook, projecting an approximately 10% drop in full-year revenue. This downward trend raises concerns about the future of the chip sector, as Taiwan Semiconductors is considered a bellwether stock for the industry.

US Semiconductor stocks and the SMH ETF

The semiconductor industry is dominated by three major players: Taiwan Semiconductors (NYSE: TSM), Intel (NASDAQ: INTC), and Nvidia (NASDAQ: NVDA). These companies play integral roles
in shaping the semiconductor landscape. 


SMH_2023-05-17_16-09-07Source: FlowBank / TradingView

Investors interested in gaining exposure to the semiconductor industry as a whole may consider the VanEck Vectors Semiconductor ETF (SMH). This ETF seeks to track the performance of the MVIS US Listed Semiconductor 25 Index, which includes 25 of the largest semiconductor companies in the United States. By investing in the SMH ETF, investors can gain diversified exposure to the semiconductor sector and potentially benefit from its growth and performance.


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