Semiconductor Outlook: 2024 Investor Guide

Overview

• We believe the semiconductor industry is expected to continue to rebound significantly at a notable growth rate in 2024.
• The resurgence is driven by increasing demand from various industries and applications.
• While general optimism about the industry's growth potential exists, concerns exist around workforce scaling, R&D efforts, and managing high inventory levels.

As we head further into 2024, the semiconductor industry is gearing up for what can be best described as a significant rebound from the headwinds of Q3 2023. According to IDC (International Data Corporation) analysts, there is an opportunity for a substantial increase in growth rate over the next year. This optimism is a welcome shift from the recent ups and downs and is primarily driven by a few key trends:

• AI Chips Continue to Dominate: The demand for AI chips keeps growing. These chips are crucial for a wide array of advanced technologies and services. As AI continues to weave into various sectors, from big data to smart devices, the need for these chips has the potential to increase dramatically.
• Renewed Interest in Smartphones: The smartphone market is witnessing a revival, partly thanks to advancements like 5G and new AI functionalities. This resurgence is a significant boost for the semiconductor sector, as smartphones remain a major consumer of these chips.
• Advancements in Automotive Technology: The automotive industry increasingly relies on semiconductor technology. With developments in Advanced Driver Assistance Systems (ADAS) and enhanced infotainment systems, cars are becoming more technology-centric. This shift is creating a substantial demand for automotive semiconductors.

While the outlook is generally optimistic, there are points of caution and risk. An annual survey done by KPMG highlights a positive sentiment among industry executives, with a majority expecting revenue growth. However, there are concerns regarding the scaling up of the workforce, research and development efforts, and the pace of capital expenditures.

In collaboration with TechInsights, SEMI also notes that despite the recovery trajectory, the industry faces some ongoing challenges. One of the key issues is managing high inventory levels, which affects the utilization rates of fabrication plants. However, there are positive signs of stabilization, such as improvements in memory IC (Integrated Circuits) sales and a steady growth in electronics sales.

Overall, we believe the semiconductor industry in 2024 has the potential for growth and resurgence, driven by technological advancements and a renewed demand in key sectors. However, this positive trend is tempered with a degree of caution as the industry navigates workforce and investment challenges alongside managing existing inventories. The year ahead looks promising but will require strategic navigation to capitalize on these emerging opportunities fully.

From an SMH-specific standpoint on performance and valuation outlook, I have compiled some takeaways from 2023 and a broad outlook on some top holdings and the portfolio as a whole.

We believe the VanEck Semiconductor ETF (SMH) may potentially display a promising outlook, particularly with its significant holdings in key semiconductor companies. Here's a breakdown of some of the analyses on SMH and its top holdings:

• NVIDIA (NVDA): NVIDIA, a heavyweight in SMH's portfolio, demonstrated remarkable growth in 2023, with its share price returning 73%. The company is ambitiously looking to triple its AI production and expand globally, including a partnership in Vietnam and Malaysia to increase production and infrastructure. NVIDIA's year-over-year revenue growth of 57% and EBITDA growth of 154% position it for continued acceleration into 2024.
• Taiwan Semiconductor Manufacturing Company Limited (TSM): As the second-largest holding in SMH, TSM is at the forefront of semiconductor manufacturing, producing advanced 3-nanometer chips. TSM stands out with a 57% gross profit margin and a 41% net income margin. It’s valued with a forward P/E GAAP 28% below its sector median, indicating a potentially favorable valuation.
• ASML Holding N.V. (ASML): ASML, a top 10 holding in SMH, is critical in the semiconductor manufacturing process, particularly for its lithography systems used in chip circuitry. The company has a 28% net income margin and a 38% return on total capital, and it aims to achieve revenues of upwards of $35 billion with a gross margin of up to 55% by 2025.

Other Key Holdings Analysis: Companies like Qualcomm, Intel, Lam Research, and Texas Instruments also form part of SMH's portfolio. Qualcomm's recent earnings have surpassed estimates, and Intel has provided optimistic revenue guidance. Lam Research exceeded revenue and earnings estimates, whereas Texas Instruments showed some shortfall in its earnings compared to estimates.

While the semiconductor industry faced challenges in the 2021-2022 period, we believe there are strong growth and profitability indicators for 2024 and beyond. SMH's diversified portfolio, including strong players like NVDA, TSM, and ASML, positions it well for potential growth, albeit with associated market and geopolitical risks.

For more information on the VanEck Semiconductor ETF (SMH), please read the Fund FAQ.

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