The iShares PHLX Semiconductor ETF (NasdaqGS: SOXX) and the VanEck Vectors Semiconductor ETF (SMH) are two of this year’s best-performing industry ETFs. The average gain sported by the pair of benchmark chip ETFs is north of 58%.
It may be hard to replicate those gains in 2020, but semiconductor stocks and ETFs can trade higher – if demand and earnings cooperate.
“Demand is expected to be decent in the year ahead. The highly anticipated 5G rollout will happen, likely bolstering the case for communications chips, the need for cloud, cybersecurity, and data-center chips remains strong and SOXX could also benefit from a video game hardware upgrade cycle later in the year,” reports Nasdaq.
Sizing Up Semis
Semiconductor equities and ETFs have exhibited high sensitivity to the trade war because China is a strong driver for the chip-making sector, which includes several fast areas of growth including gaming and artificial intelligence.
An issue for chip stocks is that the group is richly valued, meaning big names that fit that bill need to grow earnings to justify frothy valuations.
“Nvidia (NVDA) and Advanced Micro Devices (AMD), a pair of this year’s chip stars and two stocks that combine for over 13 percent of the SOXX roster, reflect the frothy valuations currently found in Chip Land. Nvidia trades at 30.30x next year’s earnings, cheap compared to the 37.45x found on rival AMD,” notes Nasdaq.
Some analysts believe that semiconductor suppliers could potentially be early winners from the ongoing shift toward high-speed 5G mobile technology and the application of artificial intelligence across industries. The developing 5G technology is a step up from the previous four generations, providing greater bandwidths and faster internet speeds. Additionally, the upgraded data capacity and ultra-fast speeds could empower and accelerate the application of A.I. across industries.
Importantly, industry revenue is expected to rise next year.
“Following a 12.8 plunge in 2019, global semiconductor market revenue will rebound to 5.9 percent growth in 2020—an 18-percentage point swing,” according to IHS Markit. “Global revenue will rise to $448 billion next year, up from $422.8 billion in 2019. The deployment of 5G will be the main factor propelling this recovery—not only because of the renewed growth it will bring to the wireless industry—but also due to the wider benefits the wireless technology will bestow on global businesses and economies.”
For more information on the tech sector, visit our technology category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.