Semiconductor Winners And Losers As Of Q2 2021
Summary
- Semis have outperformed in 2021 and there are two catalysts out there that have helped make this a reality.
- Equipment suppliers are the hottest place to be in thanks to a global investment boom seeking to increase fab capacity.
- There is increasing evidence chip demand is not as healthy as widely believed, which has serious ramifications for the fab building spree.
- Long semis makes sense, but caution is warranted as there could be trouble lurking beneath the surface.
The year 2021 is shaping up to be another strong year for semiconductors if the first quarter is any indication. For instance, the iShares PHLX Semiconductor ETF (SOXX) has gained 15.9% in 2021. In comparison, the SPDR S&P 500 ETF (SPY) has gained 7.2% YTD. However, while some semiconductor stocks have done great, others have struggled for various reasons. Why will be covered next.
Semis have done great for the most part
Semis is a label applied to a broad range of companies. SOXX, for instance, is an ETF with up to 30 different stocks. The 30 stocks are Texas Instruments (TXN), Intel (INTC), Broadcom (AVGO), Qualcomm (QCOM), Nvidia (NVDA), Applied Materials (AMAT), Micron (MU), Xilinx (XLNX), Analog Devices (ADI), NXP Semiconductors (NXPI), Lam Research (LRCX), Taiwan Semiconductor Manufacturing Company (TSM), ASML (ASML), Advanced Micro Devices (AMD), Microchip Technology (MCHP), KLA Corp. (KLAC), Skyworks Solutions (SWKS), Marvell (MRVL), On Semiconductor (ON), Qorvo (QRVO), Teradyne (TER), Monolithic Power Systems (MPWR), Entegris (ENTG), Cree (CREE), MKS Instruments (MKSI), Inphi (IPHI), Brooks Automation (BRKS), Lattice Semiconductor (LSCC), Silicon Laboratories (SLAB) and CMC Materials (CCMP).
The table below lists the previously-mentioned companies, their weight in SOXX and their gains or losses. Keep in mind that the stock market crashed in March 2020 due to COVID-19. The magnitude of the stock moves has thus been amplified. If stocks had not fallen, gains would almost certainly be much smaller.
Stock | Weight % | Change – 12 months | Change – 6 months | Change – 3 months | Change – 1 month | Change - YTD |
TXN | 8.44% | +98.22% | +34.51% | +18.05% | +12.59% | +17.02% |
INTC | 8.04% | +24.42% | +24.66% | +32.41% | +7.76% | +29.57% |
AVGO | 7.67% | +112.83% | +30.64% | +9.46% | +2.78% | +3.09% |
QCOM | 7.66% | +109.09% | +17.09% | -8.11% | +4.66% | -9.55% |
NVDA | 7.62% | +127.29% | +2.08% | +5.07% | +7.86% | +5.80% |
AMAT | 4.53% | +226.84% | +138.05% | +62.70% | +22.59% | +63.99% |
NXPI | 4.31% | +178.44% | +66.72% | +30.55% | +18.23% | +30.86% |
LRCX | 4.26% | +186.26% | +92.71% | +31.96% | +15.98% | +35.37% |
KLAC | 4.22% | +163.88% | +79.26% | +33.50% | +14.31% | +34.14% |
ASML | 4.06% | +155.85% | +72.53% | +30.04% | +17.20% | +30.63% |
ADI | 3.89% | +90.72% | +37.38% | +9.71% | +6.96% | +8.56% |
MU | 3.82% | +131.66% | +96.78% | +28.49% | +3.70% | +22.92% |
TSM | 3.75% | +168.33% | +53.94% | +14.60% | +1.55% | +14.45% |
AMD | 3.63% | +85.73% | -1.10% | -12.14% | +0.28% | -11.58% |
MCHP | 3.54% | +155.09% | +55.87% | +17.09% | +7.95% | +15.97% |
MRVL | 2.74% | +129.48% | +25.09% | +4.55% | +9.00% | +4.46% |
XLNX | 2.61% | +69.32% | +24.57% | -8.62% | +5.13% | -8.41% |
SWKS | 2.54% | +127.65% | +29.80% | +22.88% | +2.13% | +22.78% |
QRVO | 1.79% | +158.65% | +49.52% | +15.25% | +12.37% | +16.02% |
TER | 1.76% | +147.05% | +62.11% | +7.08% | +6.03% | +7.44% |
ON | 1.45% | +289.91% | +97.74% | +32.05% | +8.09% | +31.04% |
MPWR | 1.36% | +130.54% | +31.44% | +1.88% | +3.58% | +0.35% |
ENTG | 1.33% | +190.00% | +61.54% | +24.61% | +17.94% | +24.96% |
CREE | 1.05% | +266.39% | +80.78% | +10.38% | +4.80% | +8.81% |
MKSI | 0.89% | +153.81% | +79.29% | +28.20% | +23.35% | +30.17% |
IPHI | 0.79% | +132.42% | +60.84% | +12.60% | +13.60% | +12.51% |
BRKS | 0.55% | +210.20% | +95.94% | +22.95% | +10.62% | +33.59% |
LSCC | 0.55% | +185.85% | +68.09% | +7.41% | +2.35% | +6.24% |
SLAB | 0.53% | +90.57% | +51.17% | +16.57% | -2.16% | +16.16% |
CCMP | 0.53% | +84.38% | +31.50% | +23.95% | +9.91% | +24.12% |
SOXX | +126.61% | +44.31% | +16.30% | +8.66% | +15.93% |
Source: iShares
Why some semiconductor stocks have done worse than others
A number of the stocks listed above have changed directions compared to the situation at the start of Q1 2021. For instance, INTC was the only one to have ended 2020 in negative territory. A previous article covers the situation heading into 2021. All the other 29 stocks ended 2020 higher than where they were at the start of the year. But 2021 is not 2020. INTC is one of the best-performing stocks with a gain of 29.6% YTD.
AMD, QCOM and XLNX are the only companies down YTD. AMD is the worst performer with a loss of 11.6% and there are good reasons why. AMD is a competitor of INTC and the former has been able to gain ground at the expense of the latter, particularly as it relates to technology.
Anything that could potentially change this dynamic is considered a headwind for AMD. For instance, new leadership at INTC has raised optimism that INTC could regain lost ground versus AMD. AMD got punished as a result and so too did XLNX. XLNX is to be acquired by AMD and it's getting dragged along as a consequence.
QCOM has been dealt a number of setbacks in 2021. For instance, QCOM is seen by many as the big winner with 5G rolling out. However, recent quarterly numbers were not as good as some had hoped for. Furthermore, problems on the supply and demand side have added to concerns.
On the one hand, demand shifts, particularly in China, have led to MediaTek overtaking QCOM as the number one supplier of smartphone SOCs, a position QCOM has long held. On the other hand, QCOM is confronted with supply chain issues like Samsung's winter freeze fab shutdown. All these developments have weighed on QCOM.
Why some semiconductor stocks have done so well in 2021
Nevertheless, INTC is not the top performing stock as others have done even better. Stocks that have outperformed INTC fall into one of two categories. They are either semiconductor manufacturing equipment suppliers or they are suppliers of automotive chips. The first group includes the top performing AMAT, LRCX, KLAC, BRKS, ASML and MKSI. The second group comprises NXPI and ON.
That these two categories have done so well in 2021 is not by accident. There's a shortage of automotive chips, which has forced some automakers to halt production. This has boosted the stock of those that make automotive chips. The perception that supplies of semiconductor chips needs to increase has led to calls for semiconductor companies to increase production. TSM and INTC are some of the companies to have responded. They intend to spend $20B and $100B respectively to bring new fabs online.
All those new fabs need semiconductor manufacturing equipment, which is bullish for suppliers like the ones mentioned previously. At the same time, the rush into equipment suppliers has pushed up valuations. Some people may be taken aback by having to pay a lot more than what they used to. An alternative would be to go after proxies instead.
For example, AMAT and LRCX are the two top performers YTD. They have appreciated by 64% and 35%, respectively, pushing up the multiples they trade at. For instance, AMAT and LRCX trade at 22 and 24 times forward earnings respectively. A less costly alternative is Ultra Clean (UCTT), which derives over 67% of its revenue from AMAT and LRCX. UCTT could therefore be considered a proxy. Not only does UCTT trade at a more reasonable 17 times forward earnings, but it's also growing faster. A previous article explains how UCTT offers as much exposure to the semiconductor equipment boom at a lower cost.
Why all those new fabs could come back to bite the semiconductor industry
Semis have benefited greatly from the increased investment. It's widely seen as a positive for the industry and stocks have rallied accordingly. However, the fab building boom could turn out to have some negative consequences.
One of the issues mentioned in the article linked to earlier is the potential for an inventory correction down the road. Semis have benefited from strong demand, but there's evidence that recent semiconductor demand has been inflated due to several factors. A number of companies, especially those in China, have resorted to holding more inventory than they normally would to hedge against supply chain disruptions due to U.S.-China trade tensions and COVID-19.
TSM is one of the latest to address the issue of inventory building when it reportedly stated that "uncertainties led to double booking, but actual capacity is larger than demand," which implies that real demand for semiconductors is lower than what the headline numbers from many semiconductor names would lead you to believe. Companies like MPWR have acknowledged that recent growth would not be what it was if not for inventory building in China.
The addition of so many new fabs could become a problem if real demand is not as strong as widely assumed. Not only would you have companies beginning to unwind their inventories by destocking, but you would have a situation where there's too much fab capacity chasing too few customers.
Pretty much every country wants to increase production of semiconductors. Besides INTC and TSM, there is SK Hynix in South Korea with plans to invest $100B. China and the EU also want to increase domestic production. Even countries not known for semiconductor production are trying to get in on the act.
In contrast, the market for semiconductors grew by a modest 6.8% YoY to $440B in 2020 according to WSTS and that's with inventory building going on. It's not inconceivable that the market would have contracted in 2020 like it did the year before if not for inventory building. The current forecast calls for growth of 10.9% in 2021.
The unknown hanging over the industry is to what extent inventory building is skewing demand for semiconductors. TSM seems to be suggesting current capacity is already more than enough to satisfy demand if not for double booking. If that's true and more capacity is added, then it's worth asking whether there's not way too much capacity being added.
The fab building spree may have boosted investor sentiment for semis, but it could also lay the foundation for a downturn due to companies having overestimated real demand for semiconductors. The semiconductor market is not new to booms and busts due to its cyclical nature, but the next downturn could be an extended one due to the extraordinary set of circumstances that preceded it.
Source: Wikimedia Commons
Investor takeaways
Semis continue to outperform the wider market. Two catalysts have contributed to this. The shortage of automotive chips has boosted the fortunes of relevant suppliers. The perception that more semiconductor capacity is needed has helped equipment suppliers rocket to the top.
However, with all the prevailing exuberance, it may be easy to overlook other issues lurking around. Companies like TSM have acknowledged that the recent increase in chip demand is due in part to inventory building. The question then becomes to what extent inventory building has made demand look stronger than it really is and whether companies are overestimating demand in their rush to add fab capacity.
If real demand is not increasing fast enough to offset added capacity, then the ramifications could be far-reaching. Companies stand to lose a lot due to equipment depreciation. Prices will fall as supply exceeds demand, leading to an industry downturn. While downturns are nothing new to semis, the next one could be more difficult to get out of due to the amount of fab capacity being added. Equipment suppliers could be hit the hardest. New equipment is not needed as much when companies have to wait for demand to catch up with capacity.
Long equipment suppliers make sense for now, but it should be treated as a trade rather than an investment. Equipment suppliers may now rule the roost, but there could be problems lurking beneath the surface that make buy and hold a potentially costly move some may regret in the end.
This article was written by
Analyst’s Disclosure: I am/we are long UCTT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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