They’re not wrong. Costs of admission on some of the more glamorous, widely held semiconductor equities are high. They have been that way for some time. Lofty valuations on chip stocks could highlight utility with ETFs like the VanEck Semiconductor ETF (SMH ). While not value plays in the truest sense of the term, ETFs like SMH offer the benefit of some diversification.
Specific to SMH, the popular chip ETF bellwether is heavily allocated to some of the industry’s largest names. However, the fund holds some attractively valued stocks. It’s just a matter of looking further down the SMH roster.
Semiconductor ETF SMH Has Some Value Opportunities
Artificial intelligence (AI) has propelled SMH’s largest biggest holdings, including Nvidia. This prompted elevated valuations on an array of chip stocks with digital ties. However, thanks to more favorable multiples on analog names, the industry isn’t overvalued relative to historical norms.
Among smaller SMH holdings that aren’t excessively valued today, STMicroelectronics (STM) could be one of the standouts, thanks partly to its exposure to automotive industry chip demand.
Exposure to Secular Tailwinds
“ST has also fared well in microcontrollers in recent years across a wide array of customers and end markets,” noted Morningstar’s Brian Colello. “We like ST’s exposure to the secular tailwinds around rising chip content per vehicle. We also think the market is generally too concerned about the excess supply of SiC semis coming online in the years [ahead. We also think the market is concerned about] the likely expansion of Chinese semiconductor competitors.”
On Semiconductor (ON) is another example of a smaller SMH holding that isn’t richly valued. It’s one that could benefit from secular drivers outside the AI space.
“Specifically, Onsemi is the top supplier of image sensors for automotive applications like advanced driver-assist [systems. And] its semiconductors enable power management and conversion in electric vehicles and renewable energy—all of which we expect to keep Onsemi’s sales growth above that of the broader semiconductor industry,” observed Morningstar analyst William Kerwin.
NXP Semiconductor (NXPI), another SMH member firm, has its own valuation case. Like STMicroelectronics, it also has leverage to automotive chip demand.
“We think the firm will gain its fair share in electrification and safety automotive products [too. Those products include] radar and battery management systems. Overall, NXP’s auto business is well tied to the secular tailwinds around rising chip content per [vehicle. And] we think the market is too focused on a near-term slowdown in demand,” added Colello.
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