The hectic activity the semiconductor industry is currently witnessing clearly suggests it is on the path of a major transformation. Of late, Wall Street has been betting big on chip manufacturers, making their stocks the most closely watched investment assets. The sector is a direct beneficiary of the fast-growing crypto business and gaming industry, where gamers and currency miners depend on high-speed processors developed by the leading chip-makers.
The other positive elements are the growing demand for high-speed chips, which are currently in short supply, and geopolitical factors like the improving relationship between the US and China after the trade standoff.
Riding high on tech
According to experts, the main reason behind the chip industry’s protracted boom – which continued for a much longer period than most market watchers had expected – is new technologies, especially inventions based on artificial intelligence and cloud computing that require semiconductor-supported devices. It is a widely known fact that almost every modern electronic equipment and gadget use chips, sensors or memory devices.
Analysts in general are bullish in their outlook for this year and beyond, and one of the reasons is the paradigm change wireless communication is undergoing. In the coming years, the adoption of 5G technology is expected to drive demand growth in the semiconductor industry.
Experts are of the view that the semiconductor wafer fabrication equipment business would grow at a much faster pace than Wall Street estimates – a prediction that is in line with the upbeat outlook for the whole sector.
Who stands where?
Intel (INTC), the biggest semiconductor company in the US, is pinning hope on its recent venture into the autonomous vehicle sphere to provide technology to around eight million self-driving cars. Some market-watchers believe the move, which came amid increasing competition from arch-rival AMD (AMD), is too ambitious given the uncertainties surrounding the self-driving technology.
Intel reported above-consensus results for the first quarter, reflecting double-digit sales growth across all business segments led by Data Center and Internet of Things. The company’s shares gained around 3% after the earnings report came out in April, but has been losing momentum since the beginning of June.
Among the other top players, AMD last week received a ‘strong buy’ rating from JP Morgan, anticipating the stock’s low-volatility status will help it outperform the sector, or, maybe the market itself. In April, the company reported better-than-expected earnings for its first quarter, aided by a 40% growth in revenues.
AMD shares, which made some major gains after the robust quarterly results and bullish guidance, last week jumped to the highest level in more than a decade and closed Friday’s session up 2.42%.
Nvidia (NVDA) is seen thriving on the growing demand for its specialized processors in AI development, gaming and autonomous vehicles. The company has a strong customer base in the crypto world also.
Last month, Nvidia posted better-than-expected results for the first quarter, with the driving force being strong data center and gaming revenues. The shares hit a record high in the first week of June, but pared some of the gains and ended the week lower.
In the case of Qualcomm (QCOM), a lot will depend on the Chinese regulators’ stance on its proposed $44-billion acquisition of Dutch chip-maker NXP Semiconductors (NXPI). Unlike its peers, Qualcomm stock witnessed frequent volatility over the past twelve months and ended the last trading session at the levels seen at the beginning of the year.
Meanwhile, Micron (MU) is relying primarily on the conventional business model for growth, and has initiated a major capacity expansion program for its DRAM portfolio. Though low-priced, Micron stock outperformed most of its peers so far this year and hit a near-two-decade high last month, continuing the rally started after the company reported strong second quarter results and revised up its guidance. However, the stagnation in the smartphone market and falling memory prices could be a drag on Micron’s prospects in the longer term.
Broadcom (AVGO), which recently backed off from a hostile bid to acquire rival Qualcomm, needs to develop its technology to be able to stay competitive in the fast-growing sector. So far, 2018 has been a bad year for the company’s stock, which failed to keep the momentum seen towards the end of 2017 when it hit a record high. This week, the shares recovered modestly from the big loss it suffered after last week’s dismal earnings results.
A word of caution
Meanwhile, the cyclical nature of the semiconductor industry, characterized by a period of high demand followed by one of oversupply, could be a cause of concern for investors. Past experience shows that most often booms are followed by bursts that dampen market sentiment. So, long-term investors need to exercise caution while dealing in semiconductor stocks.
The other factors that could create headwinds for chip-makers are unfavorable variations in currency exchange rates, trade war tensions between the US and China, and potential inconsistencies in consumption patterns in regional markets.