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Time to Buy the Dip in Semiconductor ETFs?

Sanghamitra Saha

Semiconductor stocks have performed well this year despite ebbs and flows in U.S.-China trade tensions. iShares PHLX Semiconductor ETF SOXX is up about 39% in the year-to-date frame (as of Oct 22, 2019).

However, most-recent indication offered by Texas Instruments TSX does not mean well for the stocks. Its fourth-quarter revenue forecast lagged the lowest estimate on Wall Street. According to Texas Instruments, “most markets weakened further.” Analysts are of the view that it is not “an auspicious start to the earnings seasons for semis.”

Reacting to this news, semiconductor ETF SOXX lost about 1.9% on Oct 23, 2019. Intel Corp. INTC, Xilinx Inc. XLNX, Microchip Technology Inc. MU, Analog Devices Inc. ADI, Nvidia Corp. NVDA — all lost on the news.

Prediction from the research firm IHS Markit is also not hopeful as this year the sector’s revenues are likely to fall by almost 13% over last year. The downturn was instigated by a freefall in DRAM and NAND memory pricing "that started in late 2018 due to an oversupply of components." Samsung also recently reported that its operating profit may have dropped 56% in the third quarter.

What Can Help Semiconductor Industry Ahead?

The pain in the semi space seems to be turning the corner and revenues will rebound next year.Per HIS Markit, 5G boom will play a major role in saving the semiconductor industry in the form of creating demand for microchips. The initial round of rollouts will be seen this year and throughout 2020. By the end of 2020, 5G handset sales (15-20 million units) should make up about 1% of total smartphone sales, per Deloitte (read: Tap 5G Boom With These ETFs).

IDC expects the smartphone market to record 1.6% growth in 2020, after three straight years of global contraction. Gartner too expects smartphone sales to grow again in 2020 after a decline in 2019, thanks to “broader availability of 5G models and the promotion of 5G service packages in various parts of the world by communications service providers."

IHS Markit is thus estimating that global semiconductor market revenues will recoil to 5.9% growth in 2020, with revenues rising from $422.8 billion this year to $448 billion next year. Top semiconductor companies like Intel, Samsung, Taiwan Semiconductor, Qualcomm, Broadcom and others will be great beneficiaries of this trend.

Also, consumer spending on technology is on the rise and is expected to grow by 5.3% in 2019. Rising enterprise spending and emerging technologies like cloud computing, artificial intelligence and big data are acting as catalysts for the semiconductor sector.Global spending on technologies and services to shift companies to the digital age are expected to reach $1.8 trillion by 2021, per data from International Data Corp (read: Bet on BlackRock's Megatrends With These ETFs).

The upcoming holiday season can also be instrumental in driving the semiconductor space higher as there is a tendency to buy tech devices in Black Friday and Cyber Monday deals. Such euphoria leads to the sales of more tech gadgets and higher demand for semiconductors (read: Should You Buy Apple ETFs Ahead of the Holiday Season?).

Research firm IDC estimated that global PC shipments increased 3% annually in Q3 to 70.4 million, following an estimated 4.7% growth in Q2. Gartner estimated that PC shipments rose 1.1% to 68.1 million in Q3, after an estimated 1.5% Q2 growth. If PC shipments rebound, semiconductors are poised to benefit.

Last but not the least are signs of a solution to the U.S.-China trade relation. Earlier this month, the United States and China seems to have reached some mutual understanding during high-level trade negotiations in Washington. If there is a concrete trade deal between the duo, semi stocks and ETFs are set to explode as the industry is highly sensitive to U.S.-China trade relations.

Buy the Dip

Given that the above-mentioned positives are likely to happen in the coming days, investors can play funds like iShares PHLX Semiconductor ETF SOXX, SMH, SPDR S&P Semiconductor ETF XSD, Invesco Dynamic Semiconductors ETF PSI and First Trust Nasdaq Semiconductor ETF FTXL with a long-term view. The recent decline in semiconductor ETFs opens up a nice opportunity to buy these funds.