The timing may be just right to buy Nvidia or other semiconductor stocks
By Philip van Doorn
A combination of a seasonal lull for chip makers, rising earnings estimates and a price decline could make for a good setup
So far this year, the PHLX Semiconductor Index has increased 8.7% (with dividends reinvested), but it has declined 7.7% in April. Meanwhile, shares of industry star Nvidia Inc. have declined 12% this month. Then again, Nvidia's stock has risen 61% so far in 2024, after more than tripling in 2023.
So what are investors to think of the recent action in the semiconductor space? In the Thursday Need to Know column, Jamie Chisholm shared ideas from equity strategists at Bank of America who had some encouraging words: Semiconductor stocks typically pull back in April and rally in May.
So even if you are a long-term investor rather than a short-term trader, you may be looking at an opportunity to play the semiconductor space broadly, or to select individual companies in the space. One easy way to invest in the industry is through the iShares Semiconductor ETF SOXX, which tracks the performance of the PHLX Semiconductor Index SOX by holding all 30 of its stocks. This approach is weighted by market capitalization, which means that Nvidia (NVDA) makes up 8.4% of the SOXX portfolio, according to data provided by FactSet.
Is the semiconductor group trading high, relative to expected earnings?
Now you might be wondering about the relative valuations of semiconductor stocks. The PHLX Semiconductor Index trades at a forward price-to-earnings ratio of 27.8, which is up from 24.3 at the end of last year, but down from a peak of 33.3 on March 7, according to FactSet. The forward P/E is based on current prices and rolling 12-month earnings-per-share estimates for the 30 component stocks, weighted by market capitalization.
In comparison, the forward P/E for the S&P 500 SPX is 20.2, which is up from 19.6 at the end of last year, but down from a 2024 high of 21.1 on March 28.
Here are current and average valuations for the two indexes:
Index Forward P/E 3-year average P/E 5-year average P/E 10-year average P/E 15-year average P/E PHLX Semiconductor Index 27.8 22.1 21.1 17.9 17.2 S&P 500 20.2 19.1 19.5 18.1 16.4 Source: FactSet
And here are current valuations relative to the averages:
Index Current P/E to 3-year average Current P/E to 5-year average Current P/E to 10-year average Current P/E to 15-year average PHLX Semiconductor Index 126% 132% 155% 162% S&P 500 105% 104% 112% 123% Source: FactSet
Both indexes are trading above the longer-term averages, but this phenomenon is more extreme for the semiconductor group.
Here's a comparison of total returns for SOXX and for the SPDER S&P 500 ETF Trust:
ETF Ticker 1-year return 3-year return 5-year return 10-year return 15-year return 20-year return iShares Semiconductor ETF SOXX 52% 48% 206% 776% 2,064% 1,124% SPDR S&P 500 ETF Trust SPY 24% 27% 88% 222% 674% 548% Source: FactSet
Looking at the 15-year and 20-year returns, the semiconductor group was hit even harder during the 2008/early 2009 financial crisis than the broad market was.
Here are average annual returns:
ETF Ticker 3 year avg. return 5 year avg. return 10 year avg. return 15 year avg. return 20 year avg. return iShares Semiconductor ETF SOXX 14.1% 25.1% 24.2% 22.7% 13.3% SPDR S&P 500 ETF Trust SPY 8.2% 13.4% 12.4% 14.6% 9.8% Source: FactSet
And here is a comparison of weighted five-year compound annual growth rates (CAGR) for revenue and EPS for the two indexes through 2023. The numbers are adjusted by FactSet for companies whose fiscal years don't match the calendar.
Sector Five-year sales CAGR through 2023 Five-year EPS CAGR through 2023 PHLX Semiconductor Index 7.5% 7.1% S&P 500 6.4% 6.6% Source: FactSet
Now let's look ahead at projected CAGR for the two indexes:
Sector Two-year estimated sales CAGR through 2025 Two-year estimated EPS CAGR through 2025 PHLX Semiconductor Index 9.5% 20.3% S&P 500 5.7% 12.6% Source: FactSet
One might argue that you get what you pay for. The semiconductor group trades at a high P/E relative to the S&P 500, but it has grown sales and earnings more quickly than the broad index has over the past five years.
And the semiconductor group's outperformance by these measures is expected to accelerate.
Screening the SOXX 30
Let's begin by looking at forward P/E ratios for the entire SOXX 30 group of stocks and compare those to the ratios one year ago, while also showing one-year price changes, this time excluding dividends.
The list is ranked by how much the forward P/E has changed over the past year, ascending:
Company Ticker Forward P/E Forward P/E one year ago One-year change in forward P/E Forward P/E to 5-year average 1-year price change Nvidia Corp. NVDA 30.1 55.2 -46% 76% 195% Intel Corp. INTC 21.4 31.4 -32% 129% 16% Axcelis Technologies Inc. ACLS 13.4 18.9 -29% 75% -22% Qorvo Inc. QRVO 14.5 20.3 -29% 96% 22% ON Semiconductor Corp. ON 14.7 16.0 -8% 89% -12% Rambus Inc. RMBS 25.7 26.2 -2% 132% 16% Teradyne Inc. TER 28.6 26.5 8% 124% 3% MKS Instruments Inc. MKSI 22.0 19.6 13% 135% 36% United Microelectronics Corp. ADR UMC 11.8 10.4 14% 84% -4% STMicroelectronics NV ADR STM 12.8 11.2 14% 78% -10% Lattice Semiconductor Corp. LSCC 49.0 41.4 18% 121% -21% NXP Semiconductors NV NXPI 16.4 13.0 26% 105% 38% KLA Corp. KLAC 24.2 19.2 26% 133% 76% Skyworks Solutions Inc. SWKS 13.3 10.5 27% 96% -5% ASML Holding NV ADR ASML 37.4 28.6 30% 111% 42% Lam Research Corp. LRCX 25.2 19.1 32% 142% 72% Applied Materials Inc. AMAT 22.1 16.5 34% 135% 73% Taiwan Semiconductor Manufacturing Co. Ltd. ADR TSM 20.4 15.1 35% 101% 57%
(MORE TO FOLLOW) Dow Jones Newswires
04-27-24 0607ET
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