Global shortages of microprocessors meant 2021 was a record year for the companies making the chips, but despite continuing strong prospects for this year, investors have soured on the sector.
The Nasdaq Global Semiconductor Index (NDQ: GSOX) which follows 80 of the largest global semiconductor firms, has fallen 36 per year-to-date compared far more than the 26 per cent 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 for chips – is allowing companies to shift production to meet demand in other areas.
This is slowly easing bottlenecks, but they will take some time to unwind. One recent estimate by the head of the industry association SEMI, which represents 2,000 companies involved in the chip design and manufacturing supply chain, says 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, senior vice president of research with Wedbush Securities Inc. in Boston.
He points to a handful of energizers. 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 such things as infotainment, warning lights and engine management. Another trend is the Internet of Things (IoT) which is interconnecting devices. There is rising demand for Artificial intelligence (AI) 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 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,” he says.
A new challenge has been Russia’s decision to limit the exports of such 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 produce electronic chips. However, Mr. Bryson believes the market for these gases in chipmaking is quite small and the impact is likely to be slight.
Mr. Bryson and Hans Albrecht, vice-president, portfolio manager and options strategist at Horizons ETF Management (Canada) Inc. in Toronto agree 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 Inc. NVDA-Q, best known for the graphic processor units used in gaming systems and high-end workstations.
Both stocks are top holdings in the Horizons Global Semiconductor Index ETF (TSX: CHPS) comprising 18 per cent of the fund. Both stocks are down sharply, with Nvidia off 43 per cent year-to-date and ASML down 36 per cent.
Mr. Albrecht notes that from the March, 2020 low to its August, 2021 high Nvidia rose more than 500 per cent. So, the current selloff seems steep, but the shares are still up 165 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 a catalyst for automation as a way to cope with labour shortages and rising labour costs.
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 whether that assumption is valid.
One stock he likes is Advanced Micro Devices Inc. (NDQ: AMD). He says AMD has a 20 per cent market share for chips used in personal computers and less than that for those used in such things as servers. So, just a one-point gain to 21 pr cent adds up to 5 per cent growth.
Both analysts say at current prices the sector is attractive, but neither is sure the bottom has been reached.
Mr. Albrecht says investors seem to be betting on a recovery, noting that semiconductor ETFs 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.
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.”