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Chip Stocks May Slow After Scorching Three-Year Streak

The popular Philadelphia Stock Exchange Semiconductor Index has risen over 50% in 2019 and 2020.

The wild rise of chip stocks over the last three years may not sustain itself in 2022, with valuation wobbling after supply chain issues and some parts of the market dubbed "excessively hot," experts warned this week.

The Philadelphia Stock Exchange Semiconductor Index (SOX), a premium basket of 30 semiconductor stocks, is up 36% this year ahead of the Nasdaq 100 Stock Index, for the third year in a row. 

The popular chip stocks index fund rose over 50% in 2019 and 2020, Bloomberg reports.

That's a whopping 250% return for all three years combined — a pace so hot that it transcends the tech stocks rally of the 1990s, which eventually led to the dot-com bubble burst in 2000.

Shares in many chip makers like Nvidia  (NVDA) - Get NVIDIA Corporation Report, Advanced Micro Devices  (AMD) - Get Advanced Micro Devices, Inc. Report and Broadcom  (AVGO) - Get Broadcom Inc. Report have risen sharply amid continued demand for processors.

But an ongoing chip shortage sparked by the pandemic has affected everything from cars to home appliances for nearly two years. That could have produced a backlog that may collide with other market factors for a substantial sector correction, experts say.

"A possible inventory buildup, extended valuations and the threat of a jump in interest rates," could lead to a drop in chip stocks, Bloomberg reports.

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“2022 will be a year when the SOX will struggle to repeat the significant relative outperformance it has enjoyed for the last three years,” Mirabaud Securities Analyst Neil Campling told Bloomberg. 

“At some point next year, we will discover that some of the current backlog semiconductors have will prove to be double ordering,"Campling added.

The Nasdaq-100 consists of the 100 largest non-financial stocks that trade on the Nasdaq and is the index tracked by the heavily traded QQQ exchange-traded fund and many other securities.

Chipmaker Broadcom last week said some areas in the semiconductor market look “excessively hot," according to the Bloomberg report. 

"The company is making efforts to ship only products that will be used in production rather than sit on inventory shelves for future need," Chief Executive Hock Tan remarked during the earnings call, Bloomberg reports.

Last month, analysts at Wedbush Securities called Nvidia's stock expensive and expressed concern about its valuation while maintaining that the chipmaker's fundamentals are undeniably excellent.

Nvidia is the largest chip company in America by market value.