Jacob Sonenshine
Semiconductor stocks are surging following a recent pullback -- and it may be time for investors to start buying again.
The iShares Semiconductor exchange-traded fund (ticker: SOXX), up 1.8% on Tuesday, is having a very good day, which is a nice change of pace. The ETF, which counts Nvidia $(NVDA)$, Broadcom $(AVGO)$, and Advanced Micro Devices $(AMD)$ as its top three holdings, has dropped about 8% from its peak for the year hit in early August. And that too was a change of pace, coming as it did after the fund posted a double-digit gain to start the year as the rise of the artificial-intelligence drove demand for more chips.
The rally comes right where you'd expect it to. Valuations look reasonable. The semiconductor ETF's forward price/earnings multiple is just over 21 times, down from 24 at its recent peak. That's not so expensive when relative growth is taken into consideration. The companies in the fund, in aggregate, are expected to see earnings per share grow at a roughly 17% annual clip in 2024 and 2025, according to FactSet. The multiple is just 1.2 times its earnings growth, whereas the S&P 500's roughly 18.5 times multiple is more than double its expected annual profit growth over the same period. That means for every percentage of earnings growth in semi-stocks, investors are actually paying a lower price versus what they'd pay for that growth for the rest of the market.
Semiconductor stocks are also trading close to a key level, where buyers do tend to come in. At about $491, the semiconductor ETF is just above "support" at $478, near August's closing low. That's also a level that technically keeps the fund in its uptrend since October of last year. So long as that level holds, it's a sign that investors believe semis can keep growing -- and their stocks can keep rising.
That, of course, reflects the long-term fundamental care for the stocks as well. "The semiconductor industry is now in the midst of a revival, primarily induced by the surge in AI-centric technological advancements, " writes Evercore ISI strategist Julian Emanuel.
The chips were down, but they don't look like they'll stay down for long.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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August 29, 2023 12:05 ET (16:05 GMT)
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