1. A bunch of semiconductors hit record highs!
This year has been an insane bull market for semiconductors! $NVIDIA Corp(NVDA)$ $Taiwan Semiconductor Manufacturing(TSM)$ $ASML Holding NV(ASML)$ $Broadcom(AVGO)$ $Applied Materials(AMAT)$, and more have all hit record highs!
Data as of 12th June 2024
$Texas Instruments(TXN)$ $ARM Holdings Ltd(ARM)$ $Micron Technology(MU)$ $Intel(INTC)$ $Analog Devices(ADI)$ $KLA-Tencor(KLAC)$ $NXP Semiconductors NV(NXPI)$ $Marvell Technology(MRVL)$ $Microchip Technology(MCHP)$
2. But, after such a crazy rally, should we still chase these semiconductor stocks?
To answer that, let's rewind and understand the reasons behind this bull run.
First of all, semiconductor is a cyclical industry. During the pandemic, global stimulus and work-from-home trends fueled a surge in consumer electronics demand, setting new records for semiconductor sales.
But post-pandemic, inflation hit Europe and the US, consumer electronics demand dipped, and the semiconductor industry entered a downturn, dragging down stock prices.
In March 2023, semiconductor sales stabilized and started to rebound, and the $Philadelphia Semiconductor Index(SOX)$ followed suit:
And secondly, this bull market is unlike any other. Traditionally, semiconductors were dominated by sales in phones and PCs. But now, we have AI adding fuel to the fire, especially the massive surge in GPU sales.
$NVIDIA Corp(NVDA)$ the leader in GPUs, has seen its annual revenue jump from $27 billion before the AI boom to $79.8 billion and is expected to hit $120.3 billion next year!
The explosion in AI demand is driving up demand for chip manufacturing and equipment, and the entire supply chain is booming!
So, in essence, this epic bull market for semiconductors is a combo of a cyclical rebound and the AI revolution.
Looking at valuations, the $Philadelphia Semiconductor Index(SOX)$ price-to-sales ratio has hit an all-time high. But considering the industry's recovery and the AI demand explosion are now well-known, we're probably in the latter half of this bull market:
In terms of individual stocks, NVIDIA's price-to-sales ratio is now at 37x, surpassing the previous high of 34x. But considering NVIDIA's revenue growth is far surpassing previous bull runs, and its AI GPUs are in a monopoly position, with gross margins jumping from 66% to 76%, this valuation bump is justified.
Analysts expect $NVIDIA Corp(NVDA)$ 's annual sales to exceed $120 billion. Based on that, its forward price-to-sales ratio is still at 25x, indicating further upside. NVIDIA could easily become the world's most valuable company!
TSMC, which provides contract manufacturing services to NVIDIA, has a price-to-book ratio of 6.5x, still below its previous bull market high of 8.5x, leaving room for growth.
And $Taiwan Semiconductor Manufacturing(TSM)$ needs ASML's lithography machines to make chips. ASML's current P/E ratio is 53x, still not touching its previous semiconductor bull market peak.
It's worth noting that the semiconductor equipment boom lags behind sales. According to management guidance, this year is a steady year for ASML, but 2025 will be the breakout year, with analysts expecting a whopping 32% revenue growth next year!
That means $ASML Holding NV(ASML)$ 's valuation will likely come down, leaving room for further upside!
The same goes for Applied Materials and Lam Research, other semiconductor equipment stocks. Their historical highs are backed by similar logic as ASML's.
In summary, while semiconductor stocks have already seen significant gains, the addition of AI as a revolutionary variable in this bull market suggests that valuations will exceed previous highs.
So, while we may have missed the most explosive phase, there's still good money to be made for investors!
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