It’s summer, so the temperature outside is rising, but semiconductor stocks and the related exchange traded funds have been hot all year.
Up nearly 47% year-to-date, the (SMH ) embodies that trend. Indeed, SMH and its counterparts are being propelled by investors’ enthusiasm for the artificial intelligence (AI) investment theme — one’s that’s been a boon to SMH member firms such as (NVDA), among others.
There’s no denying that Nvidia, which accounts for 19.22% of the SMH portfolio, has been a force for good for chip stocks and ETFs this year. While the stock is up a staggering 188.10% year-to-date, stoking concerns about valuation and a potential pullback, the long-term outlook for SMH’s largest holding remains attractive.
“Across the tech landscape, Nvidia’s spectacular outlook for 2023 indicates that leading cloud and Internet companies are racing to train and expand their AI models. We think AI has the potential to revolutionize industries and how people interact with the world,” noted Morningstar analyst Brian Colello.
More Catalysts for SMH
Investors can easily become too excited about AI. After all, the theme is generating plenty of headlines, many of which extend beyond the financial press. However, there’s much more to the semiconductor stocks demand story, and that’s potentially positive news for market participants mulling SMH.
“Meanwhile, the dreadful demand environment for PCs and smartphones seems to have bottomed, although we only anticipate a slow recovery. Automotive semis was the last sector to see headwinds, but supply/demand seems to be normalizing,” added Colello.
Specific to personal computers (PCs), demand has been tepid over the past several years, weighing on a primary end market for chips. However, analysts expect that funk to end later this year and into 2024 as corporations embark upon what could be a sizable PC upgrade cycle.
AI is pertinent here as well because as more companies embrace the technology, the need for more advanced computing power grows. That leads to more demand for more powerful, pricier chips. Further adding to the allure of SMH as an AI play is the point that while estimates around the market’s size are fluid, there’s no denying it’s going to be huge.
“We anticipate that AI development will be enormous, but monetization may be scattered. Some firms may weave AI into existing products, while some may earn direct fees from AI models,” concluded Colello. “We take our best attempt to size the market (see next chart), based on a blend of industry estimates, but we still think that the impact of AI may go far beyond the impact of higher software prices.”
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