Investing in a stock market with a strong and sustained demand for its products is the dream of any investor. Within the technological values, semiconductor or chip manufacturers meet this premise and the market rewards them. In 2020, the PHLX Semiconductor Sector index, which includes the 30 largest companies in this sector, rose 51%, above the 41% won by the Nasdaq 100, and so far this year its revaluation is close to 10%, twice the technological index par excellence.
However, since the beginning of last April, the semiconductor sector has suffered a drop of around 6%. Jaime de León Calleja, Mutuactivos equity manager specialized in technology, indicates the reasons for the recent cut: “First, the positioning of investors who, given the return of inflation and the reopening of the economy, have rotated towards values more exposed to the cycle after the stellar performance of the sector. Second, the current supply problem, which cannot satisfy the strong demand ”, he explains.
Thus, this lack of capacity of the companies has created some confusion among investors that, in the opinion of the managers, will be temporary. And it is that the appetite for semiconductors is the great asset to bet on these companies. “They are one of the technology subsectors that we like the most. We would take advantage of the falls to add exposure to this sector, says De León, who foresees that the supply of chips will not have normalized until the end of this year or the beginning of next.
Rodrigo Utrera, manager of the BBVA Technology and Telecommunications fund, argues that the demand for semiconductors continues to be between 30% and 40% higher than the supply. “The bottleneck seems to have continuity. This, together with the growing global computing needs, sets a solid foundation to expect trend growth to continue in the medium term ”, he adds.
The analysts consulted highlight two large areas of demand for semiconductors. On the one hand, traditional technology, such as mobile telephony, laptops, tablets, consoles or Smart TV, which have had a great boost with the Covid-19 pandemic and, on the other, the development of the electric and autonomous car, Artificial Intelligence, Robotics, the Cloud, the Internet of Things or electrification, which require huge amounts of chips. Furthermore, as managers Geraldine Sundstrom and Yishan Cao indicate in a recent report by manager Pimco, “the pandemic has accelerated the digitization of companies and in this cyclical recovery, the focus is not on infrastructure; what matters are the chips, not the bricks ”, they explain.
The technological world is very changeable and that is why managers and analysts are in favor of a very active management of these values. A clear example is the American Intel, which in 1971 released the first microprocessor called 4004, thus innovating after dedicating itself until then to the manufacture of memory chips. But continuing technological challenges in the world of microprocessors explain unexpected business moves. For Janus Henderson, Intel maintained the momentum for many years and has suffered from the decision not to supply chips for the iPhone, from increased competition and from not following the trend of outsourcing.
Not long ago Intel’s market capitalization was higher than that of Taiwan Semiconductor Manufacturing Company (TSMC) – the largest semiconductor producer – but now TSMC ($ 580 billion) is more than double that of Intel ($ 226 billion). dollars) by market value. Nvidia ($ 363 billion) recently surpassed Intel in capitalization and others like ASML are dangerously close to it.
The other major division of the business in this sector occurs between semiconductors for consumer products, which tend to be more sophisticated and offer better margins, compared to industrial chips, preferably destined for the automotive industry. Producers have focused more on the former, which explains the shortage for cars, especially when demand for vehicles has started to pick up.
With the sole exception of the US company Intel, the rest of the large semiconductor stocks rose during 2020, with an average gain of 60%. In these first months, however, there are important differences. Applied Materials led the way at 49%, closely followed by ASML Holding at 31% and LAM Research at 30%. On the other side of the scale, AMD and Qualcomm post losses of more than 10% and the giant Taiwan Semiconductor, with a capitalization of $ 571 billion, is up 2.7%.
Experts believe that it is necessary to be more selective this year after the hikes of 2020. However, in a recent report the US bank Goldman Sachs notes that “most of the companies in our universe of semiconductor coverage reported results above the consensus in the first quarter of the year. An improvement based on a robust demand, in an environment of rising prices and also in a greater utilization of its factories ”. Goldman also highlights that both in terms of income and earnings per share, these companies improved the consensus forecasts of Facset, which includes the forecasts of a large number of analysts.
Juan Tuesta, an analyst at Bankinter, comments on the four reasons to invest in semiconductors in 2021 in a study on the sector. “Profit growth continues to support valuations despite accumulated increases; the strong boom in demand; corporate movements such as the purchase of ARM by Nvidia and Xiling by AMD and, finally, the market moment ”, he explains. TSMC, ASML, LAM and Applied Materials are Bankinter’s bets as manufacturers or suppliers of components that have more possibilities for diversification. Nvidia, Infineon, Qualcomm and ON Semiconductors will be the ones that best take advantage of the expected growth of the business and Micron Technologies, LAM and Nvidia stand out for their low multiples and their very healthy balance sheets with little debt.
For Rodrigo Utrera of BBVA, the key “as active managers is to know how to differentiate the long-term winners from those companies that, despite being on the wave, may experience margins problems in the future, lack competitive advantages or may have a more cyclical profile than its competitors. We like ASML or Applied Materials. “
From Mutuactivos, Jaime de León Calleja, comments that “we have exposure to the sector through companies such as ASML or Applied Materials. Other values that we like are Nvdia, AMD –which has a correction of 15% this year despite constantly beating estimates–, or Infineon, which is our way of playing the explosion that the electric car is going to suppose for the sector ”.
Advanced Micro Devices (AMD) is an American semiconductor company based in Santa Clara, California, and is among the 10 largest companies in the sector with a capitalization of around $ 100 billion. Shares are down 16% for the year, after rising 100% last year. It develops computer processors and similar consumer technology products. Goldman Sachs gives it a 12-month target price of $ 106 per share, up from $ 77 it is trading at today. “We believe that the market is underestimating the potential for growth in the medium term, which far exceeds that of the industry,” according to the bank. “The future earnings path is intact, with an earnings per share forecast of $ 2.49 for this year and $ 3.75 for 2022,” he adds.
Infineon is a German company and its leadership position in the world of radars for autonomous driving deserves a purchase recommendation from the US bank Goldman Sachs, being at the forefront of these technologies. For its part, Bankinter highlights from the company that approximately 50% of its sales are directed to the automotive sector, which “is one of the segments that is presenting the most growth potential due to the strong demand for the autonomous electric car and in general, of the traditional automobile, which requires more and more chips ”. Other fronts where the company is strong are the segments of the electricity sector, mobile telephony and card hardware security. In the year, Infineon’s share advanced 1.6% after rising 56% in 2020 and has a market value of 40.3 billion euros.
The American Nvidia is the market leader in the production of graphics processing units (GPUs) for devices ranging from tablets to workstations and gaming PCs, as well as programmable GPUs for high-power computing applications, for example in the sector. of the automobile. At Bankinter, they highlight that in recent years it has been developing a lot other areas such as data centers, artificial intelligence and robotics. The company announced last October the purchase of the British Arm for 40,000 million dollars. The operation has, however, encountered considerable reluctance among British regulators and is expected to be completed by the end of the year or in 2022. The stock has risen 14% this year after gaining 122% in 2020 and is placed in second position by stock market value, remote from the Taiwanese TSMC.
ASML is a Dutch company dedicated to the manufacture of machines for the production of integrated circuits. It is the world’s largest supplier of photolithography systems for the semiconductor industry. According to Juan Tuesta from Bankinter, it presents good prospects for 2021. ASML expects business growth to exceed double digits and the market consensus foresees a 22% rise in BNA (projected net profit) until 2022. “It has margins high levels that we hope will continue to be maintained thanks to its differential products, such as EUV (Extreme Ultraviolet Lithography) machines, a segment in which it has an 86% market share ”, he explains. ASML’s share has risen 32% in the year, after a rise of 52% in 2020. With this, its market capitalization rises to 220,000 million euros.