With the AI revolution on the horizon and the influence of Chat GPT, semiconductor stocks have enjoyed a successful year in 2023. Despite their richer valuations, many wonder if there are still opportunities to be found in the chip sector.
To assess the current state of the industry, we must examine the roller coaster ride that semiconductor stocks have experienced in recent years. Factors such as supply and demand dynamics, inventory levels, and prices have played a significant role in shaping the market. Additionally, it is crucial to analyze the performance of Asian semiconductor firms, as they have a substantial impact on the global market. Major players like Taiwan Semiconductor Manufacturing Company Limited (TSMC), Samsung Electronics, SK Hynix, and Semiconductor Manufacturing International Corporation (SMIC) are leading the way in technological advancements and meeting the rising demand for electronic devices.
In terms of financial performance, TSMC saw a 2.1% increase in earnings per share compared to the previous year but experienced a 30% decline on a quarter-over-quarter basis. Net sales also decreased from the previous quarter, and TSMC expects a contraction in its gross margin for the upcoming quarter. While earnings growth among semiconductor stocks has decelerated, most results have surpassed expectations. This trend helps explain the share price slump in the previous year followed by a rebound in the current year. If earnings continue to deteriorate, the upside potential for chip stocks may be limited. However, if results continue to exceed expectations, it is possible that chip stocks have already reached their bottom.
Investing in semiconductor stocks offers upside potential due to the promising future of AI. AI industry leaders rely on powerful hardware setups to meet the increasing demand for AI-capable hardware and software. Silicon chips and semiconductors play a crucial role in enabling these advancements. Companies like AMD and Nvidia, with their powerful graphic processing units, empower AI innovators to achieve breakthroughs without computational bottlenecks.
Furthermore, the implementation of the CHIPS and Science Act, introduced by the Biden administration, can fuel semiconductor stocks. This act aims to bring semiconductor manufacturing to the US, supporting American companies, encouraging research and development investment, and incentivizing foreign direct investments. By enhancing US semiconductor production capacity and diversifying the global supply chain, the act mitigates the risk of future semiconductor shortages and potentially lowers prices for consumers.
Despite the promising outlook, investing in chip stocks does come with risks. Geopolitical tensions, especially the competition between the US and China for semiconductor dominance, pose significant risks to the industry. The strained relations between China and Taiwan have created a vulnerable situation in the chip sector. In response, the US has introduced the CHIPS Act to protect Taiwan’s semiconductor factories. The unresolved tension between these global superpowers has driven away some investors and traders, who are waiting for geopolitical stability before reentering the market.
Another risk factor is falling demand, as evidenced by Taiwan Semiconductor’s Q1 earnings report, which indicated a decline in semiconductor demand. Although the company’s quarterly earnings exceeded market expectations, it lowered its industry outlook, projecting a 10% drop in full-year revenue. This downward trend raises concerns about the future of the chip sector, given that Taiwan Semiconductor is considered a bellwether stock for the industry.
For investors seeking exposure to the semiconductor industry as a whole, the VanEck Vectors Semiconductor ETF (SMH) is worth considering. This ETF tracks the performance of the MVIS US Listed Semiconductor 25 Index, which comprises 25 of the largest semiconductor companies in the United States. By investing in the SMH ETF, investors can gain diversified exposure to the semiconductor sector and potentially benefit from its growth and performance.