Semiconductor stocks and exchange traded funds aren’t being spared as the broader technology sector struggles to start 2022, but that weakness could open the door to opportunities with some high-quality chip names.
Some of the names that could lead a semiconductor rebound are marquee holdings in the VanEck Vectors Semiconductor ETF (SMH ), indicating that the ETF is a solid idea for investors looking to position for a snap-back rally in semiconductor equities.
While the $7.3 billion SMH is encountering headwinds to start 2022, a benefit to those struggles is that some chips stocks may now be offering investors more attractive valuations than those that were seen at the end of 2021 after the industry wrapped up a torrid pace of equity performance. Intel (NASDAQ:INTC) fits the bill as an attractively valued chip stock.
“The data centers used to facilitate the information stored, analyzed, and accessed by various front-end devices are mostly run with Intel server chips,” says a Morningstar equity report, which also notes that the company is benefiting from an increasing interconnectivity of devices, as “Intel strives to provide the most powerful and energy-efficient silicon solution to any product ‘smart and connected’.”
Intel, a member of the Dow Jones Industrial Average, is SMH’s third-largest holding at a weight of 5.62%. Another SMH member firm that looks ripe for the picking is Taiwan Semiconductor (NYSE:TSM).
“While the competition is intensifying, most new entrants are confined to low-end manufacturing because of prohibitive costs and engineering know-how associated with the leading-edge technology. To prolong excess returns, TSMC initially focuses on logic products used on CPUs and mobile chips, then focuses on more cost-conscious applications,” says Morningstar analyst Vikram Barhat.
Taiwan Semiconductor is arguably the most important semiconductor company simply because it operates the world’s largest chip foundry. Its customers include Apple (NASDAQ:AAPL) and SMH components Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA), among others. SMH allocates 11.31% of its weight to Taiwan Semiconductor, making that the ETF’s largest holding.
Speaking of Nvidia, the company is widely known for data center and gaming chips, but it also has significant long-term opportunity in multiple disruptive technologies. The stock is SMH’s second-largest holding at a weight of 8.53%.
“More recently, the company has intensified focus on artificial intelligence and autonomous driving, which leverage the high-performance capabilities of the firm’s graphics processing units,” adds Barhat. “While the bulk of Nvidia’s sales was derived from gaming, its increasing data center presence for GPUs used in deep learning has helped propel the data center segment.”
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