Albeit briefly, Nvidia (NVDA) recently was the most valuable publicly traded company. While Microsoft (MSFT) has since reclaimed that throne, Nvidia’s market capitalization exceeds the total market values of equity markets in France, Germany, and the U.K. Over the past several years, Nvidia’s seemingly unabated ascent has sparked fears regarding frothy valuations on the stock. While those concerns haven’t been validated as of yet, they linger. That isn’t to say all chip stocks are excessively valued.
For investors who want to mitigate some of the perceived valuation risk with Nvidia, ETFs such as the VanEck Semiconductor ETF (SMH ) could be sensible options.
First, a disclaimer: SMH allocates a quarter of its portfolio to Nvidia. That’s good for one of the largest weights to the stock among all the ETFs that hold it. When it comes Nvidia valuation risk, SMH may not be perfect, but it is home to several other semiconductor equities that are far less expensive than is Nvidia.
SMH Has Some Valuation Benefits
One of the benefits offered by SMH is that the ETF isn’t confined to domestic semiconductor stocks. That’s good news because some ex-U.S. names in the space are far less pricey than domestic names. Taiwan Semiconductor (TSM), which is SMH’s second-largest holding, is an example.
“Taiwan Semiconductor Manufacturing, which is responsible for about 90% of the world’s super-advanced semiconductors, is among the most well known and widely owned AI plays outside the U.S. At 23 times next 12-month earnings, it trades at about a 33% discount to Nvidia,” reported Reshma Kapadia for Barron’s.
While not necessarily inexpensive on valuation, another SMH member firm that could propel the ETF is Broadcom (AVGO). SMH’s third-largest holding had market capitalization of $839 billion as of the close of U.S. markets on June 20.
In recent report to clients, Bank of America predicted that California-based Broadcom will be the next U.S. company to sport a market cap of $1 trillion, owing in part to the chipmaker’s artificial intelligence (AI) inroads. The bank deemed Broadcom a top AI pick along with Nvidia. The two stocks combine for over a third of SMH’s weight. Again, Broadcom is by no means cheap, but it’s growing revenue at an impressive rate.
“We model 18% revenue growth for Broadcom, including the inorganic contribution from VMware, through fiscal 2028. We see high artificial intelligence sales driving supernormal growth in the next five years, but for longer-term durable growth to settle in the high-single digits on an organic basis,” noted Morningstar analyst William Kerwin.
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