Semiconductor stocks are playing important roles in broader technology sector strength this year. For example, in the first half of 2020, iShares PHLX Semiconductor ETF (SOXX) jumped 6.3 percent while the S&P 500 declined 4.1 percent.
The third quarter is in its early innings, but chip stocks are already buoying hopes for a scintillating second half with SOXX up 4.1 percent month-to-date. Fortunately, recent strength in SOXX and its components is rooted in credible fundamentals, including the 5G shift, artificial intelligence, cloud computing and increasing usage in the automotive industry, among other factors.
Adding to the case for chip stocks is that, broadly speaking, these are growth names and the growth factor shows essentially no signs of losing steam against its value rival.
“Until we see firm signs of economic reopening/vaccines and/or higher treasury yields, growth could continue to outperform,” said Bank of America research analyst Vivek Arya in a recent note to clients.
What's Making SOXX Super
The $3.10 billion SOXX tracks the PHLX SOX Semiconductor Sector Index, a cap-weighted collection of 30 chip stocks. That means the fund is benefiting in significant fashion from the seemingly unstoppable rise of Nvidia (NVDA).
Nvidia is the second-largest component in SOXX at a weight of almost 8.30 percent and that's meaningful for investors because the stock is up almost 74 percent year-to-date and recently topped Intel (INTC) to become the largest chip name by market value. Nvidia, which closed around $420 on July 9, lands a $460 price target from Bank of America with Arya highlighting “superior long-term growth profile in large, underpenetrated markets.”
“Secular tailwinds” is a phrase used by BofA in highlighting the strong second-half outlook and it's one directly applicable to Nvidia due to the cloud computing boom. Increased demand for cloud products and services because of the coronavirus pandemic means more data center demand, which is a core competency for Nvidia.
Today, the company's 2019 $6.9 billion purchase of Mellanox looks prescient because that combination means Nvidia powers half the world's 500 supercomputers/data centers.
However, there are other catalysts for SOXX, including Lam Research (LRCX) and Marvell Technology (MRVL) – two stocks that combine for 7.54 percent of the ETF's roster. Marvell is a play on the 5G rollout while Lam is favored by some on Wall Street due to expectations of increasing global components demand.
Up 30.28 percent over the past 90 days, Lam could see more upside due to “stronger-than-expected electronics demand that would tighten up semiconductor capacity, driving increased semiconductor equipment sales and/or increasing market share,” notes BofA's Arya,
Revving Up Demand
Another spark for some smaller SOXX constituents, such as Maxim Integrated Products (MXIM) and NXP Semiconductors (NXPI), is rebounding automotive. That's a scenario with coronavirus implications due to the expectations that the pandemic could prompt urban dwellers to move to the suburbs where cars essential due to a dearth of public transit options.
“We continue to see a favorable backdrop for auto-semi plays, and believe a potential suburban migration could add another secular driver,” notes Jefferies analyst Mark Lipacis. “We continue to see auto-semis as a beneficiary of an inventory restock in the second half of 2020, but we also believe that early signals suggest COVID-19 may translate to a secular shift in commuting and car buying behavior. In addition, we highlight that an incremental uptick in suburban home demand would create a tailwind, as census data shows that suburban homes have 0.2-to-1.5 more cars per home than urban homes.”
Bottom line: investors added $406.64 million to SOXX this year and it appears that opinion will be validated as 2020 moves along.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
Read Todd's Bio