The semiconductor industry, essential for technological progress, has seen remarkable expansion in recent years and is expected to reach unprecedented sales levels in 2024. In this note we explore the driving factors behind the rise of this promising sector, evaluate the sustainability of its growth and examine the investment opportunities available through CEDEARs.
The semiconductor industry, which includes the design, manufacturing and installation of integrated circuits or chips, plays a crucial role in a wide range of products. This includes from processors for computers and mobile devices to microcontrollers used in automobiles and television remote controls.
The current dynamism in the semiconductor industry is driven by the transition to advanced chips, such as those from 5 nanometers, fundamental for the development of artificial intelligence (AI), the Internet of Things (IoT) and telecommunications, thus increasing demand.
This robust market growth stands out from previous speculative bubbles, thanks to the solid expansion of revenues and profits of leading companies, especially in an environment of high interest rates that limit speculation.
Furthermore, the complexity and the high barriers to entry in the semiconductor manufacturing industry highlight the specialization and competitiveness of this sector, dominated by a few few actors which benefit from economies of scale and promote an environment of constant innovation.
The rise of the global semiconductor industry is visible in the bottom line results of recent years. Specifically, we went from revenues of 422 billion dollars in 2019 to reaching a peak in 2022 of 600 billion dollars, i.e. an increase of 42%. Although this trend stopped in 2023 – they decreased by 11% – due to moderation in demand and excess inventories, this year is estimated to reach an increase of 18%. 630,000 million dollarsa new historic high, thanks to strong demand from China which explains a third of this increase.
This good performance was also reflected in company valuations. The Vaneck Semiconductors ETF (SMH), which has rallied 118% since December 2022, has not only far outpaced the advance of the S&P 500 Index, which has risen 35%, but has also doubled its performance of the technology sector, which recorded an increase of 67%.
This performance reflects the growing importance and strong demand for semiconductors globally, driven by the accelerated digitalization of the economy, the rise of emerging technologies such as artificial intelligence, the Internet of Things and the development of 5G infrastructure.
The attractiveness of the sector is evident in the price/earnings ratio (P/E) of 62, which, although exceeding the average of the last 3 years (32.1) and that of the market in general (29), reflects expectations of a future annual profit increase of 23%. This indicator suggests that investors are willing to pay more now for future profits, given growing confidence in chip demand.
Analyzing financial indices, we observe two main indicators. On the one hand, the price/sales ratio (P/S), which is used to evaluate the valuation of a company in relation to its turnover, ideal for comparing companies in the same sector. On the other hand, the expected percentage change in earnings per share (EPS) year-over-year (YoY) gives us a perspective on the company’s profitability growth, reflecting expectations for future performance and efficiency.
Considering the dynamic semiconductor sector, stocks with significant potential available in the local market through CEDEARs stand out, selected based on qualitative analysis and their fundamental ratios. We refer to Nvidia, manufacturer of the chips used for the development of artificial intelligence, AMD, Taiwan Semiconductor and Micron.
NVIDIA (Ticker: NVDA.BA) was the best performing company, recording a 509% increase in its valuation since December 2022, a trend that continues this year with an 80% increase (96% when measured in local currency). It stood out with a 56% increase in sales in the last fiscal year, reaching $24 billion, thanks to advances in artificial intelligence chips. Furthermore, it has established itself as the third largest market capitalization company globally, with a market value of $2.18 billion. It has the highest P/S ratio in the industry, at 35.9, along with EPS growth of 89%. . These factors point to a substantial increase in earnings and project encouraging expectations for the future. Despite its high valuation, its leadership and continued innovation in the industry justify this price premium. This is an ideal option for conservative sector investors who value stability and market leadership.
Advanced microdevices (Ticker: AMD.BA) ended 2023 with revenue and profit growth, driven by record sales of its AMD Ryzen processors. Demand for its portfolio of high-performance data center products continues to accelerate, positioning AMD for strong annual growth. This makes it an attractive option for those interested in technological advancement. It has a P/S ratio of 14.8 and EPS growth of 37%. It represents a prudent choice for conservative investors looking for an established company with slightly lower multiples. It has had a 200% dollar increase since December 2022 and is up 32% this year. In local currency, CEDEAR rose 42% in 2024.
Taiwanese semiconductor manufacturing company (Ticker: TSM.BA), with its innovation in manufacturing advanced processes such as 5 nanometer processes, strengthens its crucial position in the global supply chain. It has a P/S ratio of 9.2 and EPS growth of 37%, making it an attractive investment option due to its moderate valuation and solid earnings growth. It is particularly suitable for moderate-profile investors who wish to benefit from companies that may be undervalued by the market. It has seen a dollar increase of 90% since December 2022 and is up 36% this year. In local currency, CEDEAR recorded a 46% increase in 2024.
Micron technology (Ticker: MU.BA) is well positioned to take advantage of market opportunities given the expected recovery in demand for memory chips and, together with the improvement in prices of this component, foresees a positive outlook for the company. With a P/S ratio of 6.7 and impressive EPS growth of 92%, it plays a vital role in the memory and storage industry. It is suitable for investors who are willing to take more risks in search of higher returns. It has seen a dollar increase of 87% since December 2022 and is up 9% this year. In local currency, CEDEAR is up 19% this year.
In summary, the semiconductor industry is benefiting from a period of continued growth, driven by constant innovation and growing demand for cutting-edge technologies such as artificial intelligence, 5G networks and electric mobility. Despite market volatility and possible supply chain disruptions, CEDEARs offer the opportunity for Argentine investors to participate in the development of some of the world’s most important technology companies. Among the available options, NVIDIA, AMD, Taiwan Semiconductor and Micron stand out for their growth and profitability prospects, adapting to different investment profiles.
Source: Clarin
