Since October 2022, the semiconductor market has been on a bull run. Taking the $Philadelphia Semiconductor Index(SOX)$ as an example, it has surged by an impressive 149%, significantly outpacing the $.IXIC(.IXIC)$ 's 83% gain during the same period.
This bull market has lasted for two years, making many investors quite profitable. In the spirit of being proactive, let's discuss when this big bull market might end and when investors should sell to maximize their returns.
Assessing the Fundamentals
From a value investing perspective, the stock market acts as a barometer for the economy, and the fundamentals drive stock prices. After two years of growth in the semiconductor sector, are the fundamentals still strong?
Consider the two giants in South Korea: $Samsung Electronics Co., Ltd.(SSNNF)$ and $LG Electronics Inc.(LGEPF)$ . These companies dominate the memory chip market with products like DRAM and HBM, which are crucial for AI and other semiconductor applications. Their performance can reveal a lot about the semiconductor market's health.
The South Korean Customs Service frequently updates semiconductor export data, making it a reliable leading indicator for the industry.
According to the latest figures released, South Korea's semiconductor exports in the first 20 days of October increased by 36.1% year-over-year, and up 26.2% compared to September.
The Cyclical Nature of the Semi Industry
Looking at the monthly export growth and SOX, a strong correlation emerges.
Typically, when South Korea’s semiconductor export growth hovers around 50%, the SOX tends to be at a high point. Conversely, when the export growth dips by 30%-40%, the SOX often finds itself at the bottom.
The clear patterns we see in the semiconductor sector are tied to its cyclical nature. When market demand is high, companies ramp up production. However, during economic downturns, as demand falls, the long production cycles and inventory accumulation make it difficult for companies to quickly reduce output, leading to regular fluctuations in performance.
Historical Context and Warnings Ahead
Looking at recent trends, South Korea’s semiconductor exports showed a year-over-year increase of about 38% in August and September, which is noticeably lower than the 50% growth seen from April to July. With the recent 36% growth in the first 20 days of October, it’s becoming evident that the current bull market might be entering a high point.
The peak for the Philadelphia Semiconductor Index occurred on July 11, aligning perfectly with the spike in South Korea’s semiconductor export growth. Starting next month, the export base will increase, likely causing year-over-year growth rates to continue declining. Coupled with a slowdown in rising prices for memory chips, warning signs are flashing.
$ASML Holding NV(ASML)$ 's recent quarterly report highlighted weaker-than-expected demand for non-AI chips, which adds to the concern.
Divergence Among Chipmakers
This year, semiconductor stock performance has shown a stark divide. Leaders like $NVIDIA Corp(NVDA)$ $Taiwan Semiconductor Manufacturing(TSM)$ $ARM Holdings Ltd(ARM)$, which are focused on AI chips, have seen massive price increases.
In contrast, companies like $ON Semiconductor(ON)$ , $NXP Semiconductors NV(NXPI)$ , $Infineon Technologies AG(IFNNF)$ , and $STMicroelectronics NV(STM)$ , primarily dealing in automotive and industrial chips, have struggled.
The current bull market for semiconductors is driven by AI, with NVIDIA leading the charge. Its current price-to-sales ratio stands at 35, slightly above the 34 seen during the last bull market. Analysts predict that by March 2025, NVIDIA's valuation may drop to 22 times sales, indicating significant room for growth.
In summary, while the AI chip sector continues to thrive, non-AI chips are facing tough times. This divergence became evident after ASML and TSMC released their quarterly reports.
The market’s focus will soon shift to AI demand, with NVIDIA’s upcoming earnings report taking center stage. As we analyze South Korea's export data, we must remain vigilant for potential turning points in the market.
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