AMD has a 20 per cent market share for chips used in personal computers and less than that for those used in things such as servers.DADO RUVIC/Reuters
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Global shortages of microprocessors meant 2021 was a record year for the companies making the units, but investors have soured on the sector despite continuing strong prospects for this year.
The Nasdaq Global Semiconductor Index, which follows 80 of the largest global semiconductor firms, has fallen 40 per cent year to date compared to the 29 per cent decline for the Nasdaq Composite Index. Is it time to jump in?
Analysts say the sector still has huge appeal with energizers pointing strongly to rising long-term demand for all kinds of chips. In the short term, a weakening appetite for new smartphones – the biggest single source of demand – is allowing companies to shift production to meet demand in other areas.
That’s easing bottlenecks slowly, but they will take some time to unwind. A recent estimate from Ajit Manocha, president and chief executive officer of industry association SEMI, which represents 2,000 companies involved in the chip design and manufacturing supply chain, says the global supply crunch will drag on for two more years. But that adds up to opportunities beyond short-term challenges.
“We will always have good and bad cycles, but if you’re confident about the broader trends they’re worth investing in,” says Matthew Bryson, managing director, equity research, at Wedbush Securities Inc. in Boston.
He points to a handful of trends. One is the rising demand for electric vehicles and more intelligent vehicles, generally. For example, a Ford Focus on the lot has about 300 chips, while Ford’s new Mustang Mach-E has about 3,000. The chips are used for things such as infotainment, warning lights and engine management.
Another trend is the Internet of Things, which is interconnecting devices. There is rising demand for artificial intelligence and smart software used in data storage.
The biggest trend is the transition to 5G smartphones, which need chips with ever more processing power. Here, manufacturers are readjusting short-term needs as the demand for these phones eases in China, which is one of the biggest markets for handsets.
“The question is how quickly demand can be reallocated,” Mr. Bryson says.
A new challenge has been Russia’s decision to limit the exports of inert gases such as neon, argon and helium that are used to make semiconductors. All three are used in the lasers used in the ultraviolet photo lithography that produces electronic chips. However, Mr. Bryson believes the market for these gases in chipmaking is quite small and the impact is likely to be slight.
Taking a hit in the tech selloff
Hans Albrecht, vice-president, portfolio manager and options strategist at Horizons ETFs Management (Canada) Inc. in Toronto, says the selloff is part of a broader market repricing of technology stocks.
The downdraft has captured such leaders as Netherlands-based ASML Holding NV ASML-Q, which produces the equipment necessary to manufacture microchips and has a virtual monopoly. Another victim is Nvidia Corp. NVDA-Q, best known for the graphic processor units used in gaming systems and high-end workstations.
Both stocks are top holdings in Horizons Global Semiconductor Index ETF CHPS-T, comprising 18 per cent of the fund. Both stocks are down sharply, with Nvidia off 51 per cent year to date and ASML down 47 per cent.
Mr. Albrecht notes that Nvidia rose more than 500 per cent from its March 2020 low to its August 2021 high. So, the current selloff seems steep, but the shares are still up 95 per cent from the low.
“They were in the right place at the right time,” Mr. Albrecht says.
He agrees that the sector fundamentals are stronger than ever, adding that the pandemic has acted as a catalyst for automation in a way to cope with labour shortages and rising labour costs.
Meanwhile, Mr. Bryson notes that ASML’s selloff has in part been about changing expectations. Six months ago, it looked as though there wasn’t going to be enough capacity to meet demand until 2023 or 2024. That sent the shares soaring. Now, with the global economy faltering, there are questions about whether that assumption is valid.
One stock he likes is Advanced Micro Devices Inc. AMD-Q He says AMD has a 20 per cent market share for chips used in personal computers and less than that for those used in things such as servers. Just a one-point gain to 21 per cent adds up to 5 per cent growth.
What lies ahead
Both analysts say the sector is attractive at current prices, but neither is sure the bottom has been reached.
Mr. Albrecht says investors seem to be betting on a recovery, noting that semiconductor exchange-traded funds attracted US$6.8-billion in new investment through mid-April, which surpasses the total flows of all of 2021.
“Why? Because semiconductors are a crucial foundational layer to our new world as we become more and more connected,” he says.
However, Mr. Bryson adds the market may continue to deteriorate and trying to time it is difficult.
“But if you like what a company is doing and you think they’re going to outperform their peers, invest in it,” he says.
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.
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