It’s often hard to find attractive valuations on large- and mega-cap growth stocks. That’s been the case for the bulk of 2023. However, that situation is turning for the better in recent months amid pullbacks in previously high-flying tech and tech-adjacent stocks.
That could open the door to rarely seen valuation opportunities with exchange traded funds such as the (QQQ ) and the (QQQM ). The Invesco ETFs allocate over 48% of their lineups to the technology sector. That’s widely known, but remains relevant today. That’s because a particular tech segment is suddenly home to some compelling valuations.
Believe it or not, that’s the case with semiconductor stocks, plenty of which dot the rosters of QQQ and QQQM. Morningstar Director of Technology Equity Research Brian Colello and Associate Equity Analyst Jack Keegan recently observed that chip stocks have gotten a bit more palatable on valuation following a healthy pullback.
Nvidia and More
(NVDA), the largest semiconductor holding in QQQ and QQQM, was one of the primary culprits of the aforementioned retrenchment, sliding 10% last month. That’s the technical definition of a correction. Yet that could be the buying the opportunity in a high-flying AI stock many investors have waited for.
“There is no bigger story in semis in 2023 than the massive rise in revenue in AI accelerators, led by Nvidia’s data center GPU business,” noted the Morningstar experts. “We see the world’s leading cloud computing providers racing to buy enough GPUs to run generative AI for themselves and their customers, and we don’t see this demand slowing anytime soon.”
Historically, chip demand is cyclical. It can be crimped in slack economies. But the evolution of generative AI could prop up semiconductor stocks even if the economy experiences a mild recession. That could support some of the more than 15 chip equities residing in QQQ and QQQM.
Among the individual names heralded by the Morningstar analysts is (NXPI). NXPI, which is a QQQ and QQQM holding, is among the chipmakers most exposed to the global automotive industry. That is a favorable trait due to the chip-intensive nature of electric vehicles.
“Overall, NXP’s auto business is well tied to the secular tailwinds of rising chip content per vehicle, and we think the market is too focused on a near-term slowdown in demand,” concluded the Morningstar duo.
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