Time to Tap Semiconductor ETFs on Beaten-Down Valuation?
Stocks have been in a tight spot lately due to the uncertainty emanating from the Russia-Ukraine war. However, this has opened up a great buying opportunity for some beaten down zones that offer strong long-term potential. Semiconductor is one such area. Let’s delve a little deeper.
Factors That Could Be Fueling Chip Demand Further
Semiconductor stocks are well-positioned to take advantage of the global push for building a green economy. Electric vehicle demand is heating up. Per IEA, sales of electric cars touched 6.6 million in 2021, more than tripling their market share from two years earlier.
The automotive sector has specifically advanced to include more electronic components in vehicles that rely on chips. Auto sales are poised to rebound in the near term thanks to the ebbing pandemic and growing vaccination. This has resulted in a sharp demand for chips, in fact, supply shortages.
Biden's Executive Order to Regulate Cryptocurrency
President Biden has signed an executive order that will coordinate efforts among financial regulators to study the risks and opportunities associated with digital assets. Bitcoin, one of the world’s most popular cryptocurrencies, jumped 9% on Wednesday having reacted to the news, according to Coin Metrics (read: Will Biden's Executive Order Put Crypto ETFs in Bright Spot?).
The recent rally in cryptocurrencies like bitcoin prices is a plus for semiconductor stocks. This is because mining of cryptocurrencies needs the usage of semiconductors. A hardware known as an ASIC (Application-Specific Integrated Circuit) is designed explicitly for mining bitcoin.
Global Rollout of 5G
The rollout of 5G globally has been gaining momentum. By 2025, 5G networks are likely to cover one-third of the world's population, per an article on GSMA.com. The accelerating speed of digitization in various corners like healthcare, transport, financial systems, defense, agriculture and retail has been making the future bright for semiconductors.
Increased Smartphone Sales
Robust recovery in smartphone sales is spurring demand for semiconductors. Global smartphone market grew [a moderate] 6% year over year in 2021, per Gartner. While the first half was upbeat, sales fell in the second half due to component crunch. “Out-of-stock situations for popular models and limited inventories pushed out some of the possible sales to 2022,” per Anshul Gupta, senior research director at Gartner.
Still-Compelling Valuation
SPDR S&P Semiconductor ETF XSD is down 3% past week versus 2.4% losses in the S&P 500 and a 3% decline in the Nasdaq Composite. Even after such a performance, XSD (P/E 22.78X) is cheaper than the Nasdaq 100 ETF Invesco QQQ QQQ which has a P/E of 31.53X. The S&P 500 has a P/E of 24.21X.
Other semiconductor ETFs like iShares Semiconductor ETF SOXX, VanEck Semiconductor ETF SMH, First Trust Nasdaq Semiconductor ETF FTXL and Invesco Dynamic Semiconductors ETF PSI have a P/E of 32.73X, 28.22X, 24.56X and 28.07X, respectively.
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Invesco QQQ (QQQ): ETF Research Reports
Invesco Dynamic Semiconductors ETF (PSI): ETF Research Reports
VanEck Semiconductor ETF (SMH): ETF Research Reports
iShares Semiconductor ETF (SOXX): ETF Research Reports
SPDR S&P Semiconductor ETF (XSD): ETF Research Reports
First Trust NASDAQ Semiconductor ETF (FTXL): ETF Research Reports
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