Semiconductor Stocks, ETFs Can Find 2024 Catalysts

Helped in large part by Nvidia (NVDA) and Taiwan Semiconductor (TSM), semiconductor stocks and related ETFs notched impressive performances in 2023.

As a prime example of that trend, the VanEck Semiconductor ETF (SMH) surged 73.4%. That beat the widely followed PHLX Semiconductor Index by a healthy margin. It helps when an ETF devotes more than 30% of its total weight to Nvidia and Taiwan Semiconductor, as does SMH.

Interestingly, SMH and its brethren delivered stellar 2023 showings even as overall chip demand slipped on an annual basis. That’s despite the fact that demand for AI chips, including those produced by Nvidia, increased. That can be interpreted as a sign that SMH member firms may need to find catalysts beyond AI to generate upside this year. Analysts believe it’s possible that’s exactly what will happen.

Semiconductor ETF SMH Components Could Fuel 2024 Upside

With Nvidia and Taiwan Semi combining for over the 30% of the ETF’s weight, it’s easy for SMH investors to focus intently on those names, as they should. But that shouldn’t distract from the potential potency of the ETF’s other holdings. Take the case of Broadcom (AVGO), which is SMH’s third-largest holding, at a weight of almost 6%.

Going forward, we see Broadcom benefiting from moderate, steady growth from data center networking, Apple unit sales, and upselling for its software customers. We believe artificial intelligence will become a material organic driver to the networking business, as applications like large language models require advanced network switching, where Broadcom’s chips are best-of-breed,” noted Morningstar analyst William Kerwin.

Integral to SMH’s long-term fortunes is that end markets for chips expand. That’s one of the reasons so many market participants are bullish on AI as a driver for semiconductor demand. That’s important, because personal computer and smartphone demand for chips is sluggish.

Electric vehicles (EVs) could join AI as one of the crucial end markets for semiconductors. As Oppenheimer analyst Rick Schafer noted, the average EV today has $600 worth of chips in it. But that figure could increase over time, perhaps providing upside for SMH holdings such as Analog Devices (ADI) and Texas Instruments (TXN).

“We estimate average semi content of $600/vehicle today with potential to increase by an order of magnitude in the years ahead,” wrote Schafer in recent note to clients.

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