This podcast reviews why semiconductor stocks are rebounding this year. It explores stronger orders, research, management calls and how 5G networks could fuel a new investment boom.
TRANSCRIPT
Chip stocks are one of the most volatile and exciting parts of the market. Not only do they embody all the excitement of new gadgetry and innovation. They also trade with plenty of drama, shooting higher when a cycle of orders starts to improve and then crashing when fears of weaker business take hold.
Fear was the primary emotion for most of 2018 as years of double-digit growth came to a halt. Interestingly, the Philadelphia Semiconductor Index briefly hit a new record high that March but failed to hold it and lagged all the way through Christmas.
But this year, just the opposite is happening. The index is up more than 35 percent and already made a new high. It’s also crushing the broader market’s 19 percent gain.
Buyers think last year’s slowdown was just a pause, rather than the end of the cycle. They were encouraged by signs of discipline from management teams, which quickly reduced output as orders slowed. That helped prevent the worst-case scenario of an inventory glut leading to a downward price spiral.
Some takeovers, like the Infineon’s purchase of Cypress Semi and Nvidia buying Mellanox, also maintained confidence in the space. Another big story was Qualcomm’s major patent settlement with Apple.
Then you started getting some good earnings and product wins from companies like Advanced Micro Devices and Micron Technology.
Slowly but surely the bears have retreated. And now the market’s starting to envision some other real positives.
5G Networking
Recently we have encountered hopes of 5G networking, a new technology that will make wireless communications about a hundred times faster. That will make all kinds of new things possible: artificial intelligence, augmented reality, self-driving cars and even smarter buildings.
Of course it will require tons of investment in cellular towers over the next half decade, remaking not only the way we live, but also the technology sector.
5G is a big deal. A huge deal. A multi-trillion dollar trend with the potential to impact countless stocks over dozens of quarters. Don’t ignore this story. Check our news feed at https://www.tradestation.com/insights/ for more.
Next, some analysts, especially the crowd over at Goldman Sachs, have been echoing Micron’s belief that memory chip prices have bottomed. This might sound boring, but anyone who’s traded Micron knows it’s anything but that. The other big mover in this niche is Western Digital.
Here’s another little factoid I bet you haven’t heard anywhere else: Chip jobs are booming in the U.S. As we covered at the time, June’s non-farm payrolls report showed some of the biggest gains in years for electronics and chip-making workers. Is that a sign of broader growth?
Climbing Wall of Worry?
Finally, President Trump’s trade war with China and actions against Huawei worried investors because the Asian country consumes almost half the world’s chips. But it hasn’t stopped an apparent rebound in the industry, which brings us back to the old adage of bull markets climbing a wall of worry. Nervous Nellies complain about risks from the sidelines, but then grudgingly chase higher prices as worst-case scenarios fade.
In conclusion, we’re still in the thick of a major technological revolution for computing power, data centers, mobility, AI and countless smart devices. Semiconductors are the raw material of the boom, just like coal and steel in the old smoke stack days.
Also chips have led the bull market since mid-2016. They took a pause last year but now are flirting with new highs as investors look for the longer-term growth story to continue — especially as 5G networks roll out. Are you ready?
