Semi-conductors: A battered industry, will they make a comeback?
A look at the technicals on AMD, NVDA, et al.
Together with… Shortfom
Investors,
Semi-conductors have been beaten and battered since they peaked last December. Chip demand was exacerbated by supply chain issues and crypto miners, who have now become nearly obsolete. The VanEck semi-conductor ETF (ticker SMH) shows that semi’s, along with the rest of the market, have also been participating in the inescapable bear market.
Semi’s have taken a 40% b-line to the downside YTD, whereas SPY is down only 20% and tech ETF QQQ has met them in the middle at -30%. So yes, semi’s have been getting the short-end of the stick this year, and with good reason. There are several reasons for this, which include (but not limited to):
Chip supply bottlenecks and constraints
Volatile demand related to various industries
Global macro demand softening
U.S chip export ban (this is big news that media is not talking enough about)
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Furthermore, like most things tech-related, semi-conductors have been getting hammered in parallel to the markets from the rise of inflation and subsequent rise of interest rates. They’ve been in a particular spot, supply chain bottlenecks created a lack of supply during a time of strong demand. Some of this demand was also coming from crypto miners who have now either been banned from mining in China or have lost interest with the crypto smash we’ve seen year-to-date. Bitcoin (BTC) and Ethereum (ETH), the two coins holding the reigns on the entire crypto industry are down nearly 50% in the last 9 months and over 60% in the last 12… For the time being it seems as if crypto interest has been fizzling out.
So is it time to buy the dip? A reminder that I’m no financial advisor and this isn’t financial advice, but let’s look at the historical valuations of two popular chip companies. Intel (INTC), a “value” stock, and AMD a “growth” company.
Intel (INTC)
The last several years were about INTC losing share in their CPU’s and GPU’s segment to both AMD and NVDA, but still pull in roughly $20 billion in annual revs, which is almost double of both AMD and NVDA combined. However, INTC tends to be viewed as a boring value play with a lack of vision for the future.
On the 5-year valuation chart INTC has gone from trading at a P/E of roughly 28x to a new low of what they are at now, 6x. Growth names like AMD and NVDA look slightly different, let’s take a look.
Advanced Micro Devices (AMD)
AMD has experienced times of huge growth, and thus contributed to the stock’s explosive (and volatile) P/E valuation. During the rebirth of 2019 and 2020, combined with the tailwinds of the pandemic we saw periods where AMD was trading at a P/E of over 240x (very high).
Next, I want to take a look at some of the top holdings of the VanEck Semi-conductor ETF (SMH).
I’ve included semi-conductors producers and manufacturers, as well as Applied Materials (AMAT), a materials providers for the chip industry. What I’ve included in the data below is:
Market Cap: Not really important, but you can see how big the company is.
P/E: Price to Earnings, which shows what multiple of profitability they are trading at.
P/S: Price to Sales, which shows what multiple of their revenue they are trading at.
And how far the stock is trading from the 52-week high, the 50-day Simple Moving Average (SMA) and the 200-day (SMA).
The 50-SMA is a mid-duration trend line and the 200-SMA is a longer-duration trend. Above the lines means in a bullish trend, below the lines and negative value means a bearish trend.
Most, if not all of these names are in bearish territory with a 40-60% drop from this year's high. You can see from the chart the higher P/E valued companies are more expensive with their expectation set on growth, versus a lower P/E where expectation is value and maintaining industry share. If you want exposure to the chip industry, and ETF like SMH will cover most of the top companies, if you want to play a bit higher beta, then picking individual names will do the trick.
Cathie Wood’s has recently purchased more NVDA stock, after taking some off the table not long ago. Here’s how ARKK’s NVDA position has fared over time.
At the end of the day, it’s for you to decide what’s cheap and what’s expensive, but as demonstrated in the charts above most companies are trading at a P/E of less than half of what they were just one year ago.
Ask yourself which scenario do you become a buyer in some of these names. Do you expect another 25% drop? 50% drop? On the other hand would you think it’s more likely to see a 25% drop or 50% gain in many beaten up chip names?
One thing is for certain is that if you are a long-term investor, most companies are trading below their average valuation from up to a decade a go.
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