The benchmark Philadelphia Semiconductor Index (SOX) stood at 3,789 on November 15, down (-) 0.47% for the past week, but up 35.41% on a year-to-date basis.
TheStreet’s Helene Meisler sees a pattern in the SOX that looks remarkably similar to 1999 right now, and that has repercussions for the semiconductor industry and for sector investors.
“This weekend I found myself staring at the chart of the Semiconductor Index, or the SOX, and realized that the channel lines I have been drawing in on the index charts, connecting the highs since last spring, were also present on the chart of today's SOX. Only the SOX has broken out on the upside (and the major indexes have not).
Both times, Meisler says she’s seen a rising channel that saw a breakout to the upside. “My expectation is not for a blow-off in the semis like we had in 2000, but if I am wrong, I suspect you will see this analog start popping up all over the place,” she said.
As for the current market, not much has changed.
“Sentiment is still complacent and bordering on giddy,” Meisler said. “Friday's ETF put/call ratio was 0.66, the lowest since late July when we saw a reading of 0.64. The S&P 500 promptly retreated for 2-3 days after that reading. To that, I can add that the ISE Call/Put Ratio at 1.55 is now the highest since Feb. 1. So folks are pretty bullish.”
On the supply front, The Street’s Kevin Curran said investors must consider multiple angles when approaching an extended period of microchip shortages. Can Uncle Sam pitch in and lend a hand?
“The semiconductor shortage that has wreaked havoc on tens of industries has become a global crisis, adding to issues in global supply chains,” Curran said. “Indeed, U.S. commerce secretary Gina Raimondo highlighted the level of impact on American productivity earlier this week.”
Addressing the concentration of chip fabrication in the Asia-Pacific region and its negative impact on American industry, Raimondo promoted the CHIPS Act to aid in domestic production of semiconductors, noting its passage is "essential for national security."
"The lack of domestic production in America of semiconductors poses not only an economic threat but a national security threat," the secretary said in a press conference on Tuesday. "We need Congress, the House, to pass the CHIPS Act as quickly as possible so that we can get to the business of making more chips in America."
Still, her comments do more to highlight the fact that the shortage is not nearing its close than they do to encourage confidence in a governmental response. “Her emphatic remarks appear to belie the fact that the crisis is continuing to extend and stands to severely impact industries that had anticipated relief in the near future” Curran said.
Semiconductor CEOs are not exactly providing any clarity either as predictions are far apart from executive to executive.
“For example, Advanced Micro Devices (AMD) - Get Advanced Micro Devices, Inc. Report CEO Lisa Su said she expects the latter half of 2022 to be the end of the current bottleneck,” Curran said. “Meanwhile, Marvell Technology MRVL CEO Matt Murphy has offered a more grim perspective, forecasting 2024 as a more likely close to current conditions.”
“Overall, this leaves investors with one of their least favorite feelings – uncertainty,” Curran added.
This Week’s Semiconductor Stocks
For some guidance, TheStreet’s semiconductor stock experts are tracking the following sector stocks this week.
Curran said demand is only set to increase as paradigm shifts like the emergence of the Internet of Things (IoT) and 5G will require only evermore chips to function.
“Many of these same trends are set to lift many of the tech names that have buoyed the post-pandemic recovery for years to come as well,” he noted. “That said, the returns in specific semiconductor stocks targeted at specific sectors as well as those sectors most likely to emerge early from the shortage are likely a great deal more enticing than a broad index or ETF.”
Curran pointed to graphics chip innovator Nvidia, which is far outpacing these benchmarks to the tune of a nearly 500% gain since March 2020. “In terms of its focus on both data centers since its acquisition of Mellanox and its leadership in graphics and video-game chips, the chipmaker is clearly capitalizing on current stay-at-home trends and associated demand,” he said.
In a side note, UBS has boosted Nvidia's share price estimate from $250 to $320. Nvidia also announces quarterly report numbers on November 17.
Advanced Micro Devices $146.03 5-Day Performance (-) 2.75%.
TheStreet’s Stephen Guilfoyle noted a rise in the SOX Index on Friday, November 12.
“The Philadelphia Semiconductor Index ran 1.95%, as both Advanced Micro Devices and Nvidia re-assumed their places as industry royalty,” Guilfoyle said “That all sounds growthy to me. Or is this simply inflation hedge positioning?”
Right now, Advanced Micro Devices is on track to generate about four times as much revenue in 2021 as it did in 2016, when its turnaround really kicked off.
There’s more. Thanks to that revenue growth and AMD's related bottom-line improvement, the company is set to spend nearly three times as much on R&D this year as it did five years earlier.
“The data center CPU and GPU event AMD hosted on Monday -- and which led its shares to surge to new highs -- spoke volumes about how the company's R&D budget growth is allowing it to extend its reach, via packaging innovations, better software support and the launch of products tailor-made for a subset of customers,” said TheStreet’s Eric Johnsa.
Johnsa cites AMD's new Milan-X Epyc server CPUs, which will launch in the first quarter of 2022 and can provide three times as much Level 3 cache memory as AMD's standard Milan CPUs. The AMD CPU’s share the product of a broader effort to invest in solutions that can deliver performance boosts for demanding workloads by using 3D packaging (with an assist from TSMC TSM to integrate large amounts of high-speed memory within CPU packages,” Johnsa added.
AMD also recently announced a new partnership with SAP SAP and disclosed that HPC software developers such as Cadence CDNS, Synopsys SNPS and Ansys ANSS are optimizing their apps to work to run well on Milan-X CPUs.
Going forward, AMD's R&D budget growth should help the company expand its reach and/or competitiveness in a few other fields. Some key fields to watch, according to Johnsa:
- The rollout of more competitive gaming GPUs. Recent rumors suggest AMD's next-gen RDNA 3 gaming GPU line will pack a punch.
- Partnerships with cloud giants to develop custom Arm server CPU solutions that leverage AMD's IP and accelerators. CEO Lisa Su and CFO Devinder Kumar have signaled that they're open to forming such partnerships.
- Solutions that pair AMD's silicon and IP with those of programmable chip giant Xilinx XLNX -- assuming, of course, AMD's deal to acquire Xilinx closes.
“Certainly, there’s a lot of good news which has been priced into AMD's stock since I made a bull case for the company back in May,” he said. “But at the same time, it's hard to complain much about either the company's financial or R&D execution this year.”
Investors who are bullish about AMD's growth story but uneasy about buying its stock outright at its current, elevated multiples might want to take a look at Xilinx.
“From all indications, XLNX remains on track to be acquired by AMD by year's end and trades at a 26% discount to the AMD deal's implied price,” Johnsa said.
Xilinx is rising fast, up 25.66% for the month and 50.11% over the past 90 days – and some big fish are jumping onboard.
Last week, the investment firm Gmo Llc announced it added to a holding in Xilinx Inc by 45.05%. According to company figures, the purchase prices were between $128.63 and $159.67, with an estimated average price of $146.64. The impact to a portfolio due to this purchase was 0.3%. The holdings were 1,281,940 shares as of 2021-09-30.