By: Lisa Chai Sr. Research Analyst & Erica Allaby, Content Manager
“Semiconductor” isn’t exactly a household name, but unbeknownst to many, the technology is a core engine behind our smartphones, video games, electric vehicles, streaming media, and so many other consumer products that we’ve grown to rely on.
Semiconductor companies are enablers of AI systems and provide the foundation for computing power on our smart devices. The role semiconductor companies are playing is evolving; they now play a crucial role in technological leaps like autonomous driving, 5G connectivity, and cryptocurrency. According to a report by McKinsey, semiconductor growth from AI could be five times greater than from other growth sources.1
Until recently, investing in semiconductor stocks was a more progressive power play for those looking for exposure to cloud computing and AI companies. However, the state of the industry has those very same investors in a current state of panic. Many semiconductor companies are being faced with an unprecedented obstacle: a tight supply environment that may continue all the way until the second half of 2022.
Hurdles like these have created confusion for those invested in semiconductor stocks. However, we believe that there is a silver lining for those invested in these innovations. Let’s first explore where we are and what it means for investors in semiconductor stocks moving forward.
A State of the Market for Semiconductor Stocks
The primary issue of supply shortage was a combination of strong demand, manufacturing issues, shipping delays, seasonality, and COVID-19 impact. This supply shortage will impact the industry’s revenue growth to a certain extent, but gross margins will benefit key providers in data centers and AI, as demand for advanced nodes remains very strong.
Semis have traditionally been very volatile, due to the cyclical impact of the business. However, underlying trends appear to be strong, and we must remember that semiconductors are enablers of digital transformation, and we are still in the early days of this multi-year cycle.
In the near term, improving capacity and the stabilization of interest rates will improve the sentiment of semiconductor companies. Chip companies are increasing prices, and earnings are expected to rise through the next several quarters.
Growth Industries & Sectors for Semiconductors
Longer-term, we believe that markets in cloud datacenter/5G will continue to strengthen. We are seeing massive investments in AI/deep learning/software content in semiconductor chips that should continue the momentum for the group. Despite this challenging environment, we expect positive earnings and revenue growth in a variety of areas:
Semicap equipment providers who are enablers of leading-edge production. These companies provide solutions in the semiconductor testing market and are seeing robust growth. As complexity continues to increase, we expect that chip units will see double-digit growth.
ROBO Global ETF Companies in Semicap Equipment & Testing
· ASML (THNQ), Lam Research (THNQ)
· Teradyne (ROBO)
· Brooks Automation (ROBO)
We believe that investments into megatrends such as cloud/AI/ data center infrastructure will accelerate through the year, and should see growing momentum. Strong cloud spending trends, combined with the acceleration of digital transformation, should help sustain a robust demand environment well into the next several years.
ROBO Global ETF Companies in AI/Datacenter:
· Taiwan Semiconductor (ROBO and THNQ)
· AMD (THNQ)
· MediaTek (THNQ)
· NVDA (THNQ and ROBO)
5G infrastructure and mobile devices are ramping up. There are some spots of softness and recovery in the availability of 5G chips. We believe that 5G enterprise applications will ultimately drive revenues for businesses in manufacturing and healthcare. Apple and Samsung, the top two providers of high-end smartphones, recently postponed the launch of their latest models, due to the shortage of chips.
ROBO Global ETF Companies in 5G:
· MediaTek (THNQ)
· Analog Devices (THNQ)
· Qualcomm (ROBO)
AI/Industrials & Autos
Autos look like it has some way to go in terms of recovery, as pent-up demand, combined with capacity constraints, will cause the market to work out the supply chain issues throughout the year. These automakers will be retooling their supply chain initiatives over the coming years, as the industry is trying to prepare for the world of electric vehicles and autonomous cars.
Industrials/Internet of Things (IoT) are also seeing tightness in supply across the spectrum. The analog and discrete products (basic components) may see continued tightness through the end of 2022.
ROBO Global ETF Company Examples in Autos & Industrial:
· Global Unichip (ROBO and THNQ)
· Ambarella (ROBO)
· Microchip (ROBO)
· MediaTek (THNQ)
· Infineon (THNQ)
· Analog Devices (THNQ)
2021 Investor Outlook for Semiconductor Stocks
We believe that the semiconductor shortage will continue through this year and into early next year. However, our long-term outlook remains optimistic for semiconductor stocks, as the technological growth across healthcare, financial services, autos, and industrials is only beginning.
In order to effectively capture the growth potential of these rapidly evolving industries, we believe that investors should own a broad spectrum of technology stocks, ranging from the lesser-known companies to the current market leaders, to weather the storm — the ROBO and THNQ ETFs seek to do just that.
Within our artificial Intelligence ETF (NYSE: THNQ) and robotics & automation ETF (NYSE: ROBO) investors have exposure to 11 different subsectors within each respective universe. It’s important to own not only the frontrunners in technology but also up-and-coming, lesser-known companies that are making silent strides in the space.
We believe that many of the semiconductor companies in the ROBO Global ETFs are strongly positioned to ride this wave, thanks to better pricing power and improved visibility in the supply shortage landscape. These drivers should enable the acceleration of AI systems and capabilities, benefitting both the enablers of computing chips and the users of AI, especially improving business process automation and optimization.
1 Source: McKinsey