Semiconductor stocks and the VanEck Vectors Semiconductor ETF (NYSEArca: SMH) have been among the leaders of the technology sector’s surge and some market observers believe that trend can continue. SMH and the iShares PHLX Semiconductor ETF (NasdaqGM: SOXX) are both up more than 6% year-to-date.
Semiconductor ETFs have recently been durable performers as semiconductor stocks are rebounding to steady the broader technology sector, but that does not mean the gains are over for this suddenly hot group. However, valuations are rising for chip stocks.
“While price increases for both DRAM and NAND flash memory are raising the outlook for the overall semiconductor market, it will also put pressure on margins for system vendors of smartphones, PCs and servers,” said Jon Erensen, research director at Gartner. “Component shortages, a rising bill of materials, and the prospect of having to counter by raising average selling prices (ASPs) will create a volatile market in 2017 and 2018,” according to a statement from industry research group Gartner.
Still, investors could be paying up for future catalysts for semiconductor and broader technology names. If there is a silver lining for the rising valuations on chip stocks it is that some industry observers believe the group’s valuations should not be measured in the traditional sense because of the evolution of the semiconductor business.
“Unit production estimates for premium smartphones, graphics cards, video game consoles and automotive applications have improved and contributed to the stronger outlook in 2017. In addition, electronic equipment with heavy exposure to DRAM and NAND flash saw semiconductor revenue estimates increase. This includes PCs, ultramobiles, servers and solid-state drives,” according to Gartner.
Rising product prices are seen as another catalyst for semiconductor stocks and ETFs such as SMH and SOXX.
“PC DRAM pricing has doubled since the middle of 2016. A 4GB module that cost $12.50 has jumped to just under $25 today. NAND flash ASPs increased sequentially in the second half of 2016 and the first quarter of 2017. Pricing for both DRAM and NAND is expected to peak in the second quarter of 2017, but relief is not expected until later in the year as content increases in key applications, such as smartphones, have vendors scrambling for supply,” note Gartner.
Traders looking to make bearish bets on chip ETFs can consider the ProShares UltraShort Semiconductors (NYSEArca: SSG), which takes the -2x or -200% daily performance of the Dow Jones U.S. Semiconductors Index and the Direxion Daily Semiconductors Bear 3x Shares (NYSEArca: SOXS), which provides a -3x or -300% performance of the PHLX Semiconductor Select Index.
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