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SMH: Why I Think History Says Semiconductors Are A Sell

John Overstreet profile picture
John Overstreet


  • Semiconductors are without question the "new oil", but that does not mean they will produce positive returns for investors in the future.
  • Historically, semiconductor stock performance is more closely tied to macro conditions (for example, S&P 500 earnings and commodity inflation) than intrinsic growth.
  • There is a correlation between computer investment as a percentage of GDP and semiconductor returns, but it is not clear that it is predictive.
  • For semiconductor returns to remain positive, commodity inflation will likely have to get below S&P 500 earnings growth.
  • We have experienced a massive technological supercycle and historically, these supercycles (as with oil) have been followed by relentless bear markets.

The computer circuit board and fast-moving cars. A hand holding a CPU chipset.

Jae Young Ju/iStock via Getty Images

Our postindustrial world would be impossible without semiconductors in the way that the industrial world would have been impossible without oil. But just because they are essential does not mean they will be a consistent

This article was written by

John Overstreet profile picture
I study markets from a long-term historical view, especially the interaction between yields and inflation across all major asset classes. My most original work is probably in the following areas: long-term sector rotations; Gibson's Paradox; Long Waves; market cycles; innovation supercycles; global violence supercycles; intraweek market anomalies; cost disease and inflation; and cost disease and demographic change.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SSG either through stock ownership, options, or other derivatives. 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.

I also have long positions in QID, CMDY, and ZROZ.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (38)

Trapping Value profile picture
What a superb and timely call.
John Overstreet profile picture
@Trapping Value Very kind of you to say so. Thank you.
Good article. It’s a critical but well documented piece. I will read it again. I bought the SMH a year ago and saw it rise to about $311 before it dropped in this big downturn to about $220. Now it’s back sharply to $245. I got interested in this industry after reading articles about its strategic importance to the country. The Senate is considering a $50B investment in domestic production of chips. TSM is building a new plant in Arizona. INTC is also. Another unnamed company is building a new plant in Sherman, Tx. They have a 3000 acre property there. I have to believe that the future of chips is promising.
No matter which stock you pick, you will find comments for and against. Both with compelling arguments. The simple fact remains, semi/chips are going into more things we make. AI and EV are the tsunami that is coming. Go around your home, car, work… and found the number of digitized and electronics that require chips. The last point is, the demand for semiconductors is so high that there is a SHORTAGE. I believe that the shortage of chips will only heighten. But I digress….. go ahead and sell your chip stocks, so that you can make other people wealthy.
@Cablejc Chips are raw material, like commodities. The thing is that, as the author explains, chips are commodities of “anti” character.
Jacobin777 profile picture
There are some great arguments on both sides. That is why its important to have a DIVERSIFIED portfolio.
The important point not to miss, that nobody is discussing, is that some of the stocks are selling at insane bubble valuations, overvalued by a factor of 10x or more. It is called an ugly bubble folks. If you don't know what I am talking about, you need a frontal lobotomy, and better get it in a hurry before you lose all your money.
@ytregnillob agree but people have forgotten what a real blow up is like because the FED continues to rescue the day by printing money and driving rates into the ground.

Combine that with 2 worthless parties that refuse to even acknowledge a future debt crisis and people are conditioned to think that this is normal and making 20% returns is easy-peazy!

How many comments are we now seeing individual investors and by Wall Street that higher rates are now built into stock and bond prices. I hear it every day on Bloomberg while working out.
kpmedia profile picture
@Term Limits For Parasites Nothing is ever priced in. It's such a dumb phrase.

I think the future debt crisis has been averted, between the refi in the past 2 years, and lowering of overall debt being owed. And a lot of people are hesitant to revisit debt land.
@kpmedia government debt, not consumer
khlim115 profile picture
Do you think the start of metaverse can be a catalyst for semi’s?
John Overstreet profile picture
@khlim115 Anything is possible, but I haven't seen a case for that, and even if it turns out to be provide more than marginal benefit to semi demand, how likely is it to alter the trajectory of returns, especially where the starting point is this level of valuations?
khlim115 profile picture
@John Overstreet The price of legacy nodes will rise as companies refuse increase their production capacity for these boring, old but critical chips that are essential in just about all electronics.
a lot to take in above
@John Overstreet Semi's are so much like oil. A commodity with oversized capx included. The difference seems to be there's no value added aspect in the oil patch. Remember National Semi, just like a driller, and compare that operation to Nivida. With Nivida it's more than the semi's, its plus vision. Of coarse, xPS, xB, who would want to be a buyer.
TYB profile picture
04 Apr. 2022
There are many in the index with solid business, their stock that is something else!

Some are underperforming with really good outlook! Than there are a lot that will have a lot of pain even though their business is going great.

The last thing to do is buy the index, but the gems, duh!!
sandimas profile picture
A 50% SPY drop will clearly lead to 75% or so SMH drop. So in 1-3 years SMH will be a screaming buy after it drops 75%. But you also stated the return would be extremely low until the 2030s, but I think that assumes you buy today, right?

Also, buy SOXL after SMH drops 75%.
John Overstreet profile picture
@sandimas That's a good question! I am not sure if "screaming buy" is the right word. Typically "secular" bear markets are composed of two cyclical bear markets. If you look at Chart C, for example, there was a 2x rebound off of the 2002 low, but with the 2008 crisis, they fell even lower. If there were a Depression-like sell off (see Chart F), in which these stocks fell 95% in the initial cyclical downturn, that would be a screaming buy.

The short answer is that, for long-term investors, a deep cyclical bear market off of today's highs would likely be a golden buying opportunity, with the understanding that returns would likely be cyclically volatile for some time (years).

(As for buying SOXL after a 75% drop, very risky indeed. If the index was on its way to a 95% drawdown, you could lose your money real quick).
@John Overstreet When considering the 2008 financial crash, isn't it worthy to add that it was not a normal crash, but one brought about by financial criminality? I suspect that that was the reason for the double dip and not the overall economic background.
John Overstreet profile picture
@Bepe13 I covered this in narrow form here:


But the logic generally I addressed here:


In any case, if all of these secular bear markets effectively develop the same way (eg, two consecutive downcycles, each preceded by a commodity shock, spread across a decade), what good does it do to attribute any particular cycle to 'criminality'?
Good article!! SMH is one of the worst performing investments in my portfolio this year and I’ve been lightening up on my shares the last few weeks. It’s a long term home run but right now I rather have my investment dollars elsewhere until semi’s turn around.
John Overstreet profile picture
@D.Rapp Thanks for the kind comment!
Pablo Kelly profile picture
Semiconductors are without question the "new oil"

This analogy is accurate when considering oil in the year 1900, when new uses of oil were being discovered. While more uses for oil are still being discovered, the rate of discovery is now very slow.

In contrast, the design and uses of semis is rapid. While semis may look like a commodity to buyers at HP and others, they are not the same as oil.
@Pablo Kelly Disagree. From crude oil, you not only make gas and diesel but also myriad of chemicals, fabrics, cosmetics, asphalt, even some food ingredients, you name it.
I really like to the estimated need of the semi products in the coming years vs current combined productivity semi industry can provide. Do you happen to have related research? Thanks
This article was very good from a technical viewpoint but it missed the most important driver for semiconductors and that is demand. Semiconductors go into everything that we own. There are over 1K chips in an automobile and that was not the case years ago. It will only grow as cars become more self driven. There are semiconductors in electronics such as washer, dryers, and ovens. As we migrate to a robotic world, the number of semiconductors required will only grow astronomically.
Trapping Value profile picture
@DavidJL615 What has been the growth over the last 21 years in memory?
Why has MU still delivered 1% compounded returns over that time frame?
Semi's revenue growth is tied to the hip to GDP and their margins regularly get crushed.
bubbleking profile picture
@Trapping Value because it took two decades for DRAM industry to consolidate
Trapping Value profile picture
@bubbleking Lol. Yeah that is why also SMH delivered 0% total return between 2000 and 2018.
Trapping Value profile picture
Good call. I think a 30% drop from here would be par for the course. Pricing will get smashed in the back half.
John Overstreet profile picture
@Trapping Value Thanks for the kind comment. I definitely think history suggests there is little room for long-term appreciation and lots of room to the downside.
Semiconductors are more of a secular play now than they ever have been. Technology advances and times change
John Overstreet profile picture
@swilson3828 I think this is a reasonable pushback and maybe it will translate into positive returns in the future, but it does not square with history especially well. This is something I addressed more explicitly here: seekingalpha.com/...

If you go to that article and search for "1930", you can see how that decade (the 1930s) saw strong technological growth in an era of already unprecedented technological growth. Also happened to be one of the worst decades for tech-oriented stocks (even on a relative basis).

In other words, your comment that "technology advances and times change" has to be applied retroactively, as well. The technological change of the first half of the 20th Century dwarfs anything we have accomplished in the last half century.

The question is rather, does technological progress translate into returns, and if so, under what conditions and in what timeframe?
bubbleking profile picture
@John Overstreet Possibly when the industry as a whole is set to 2-3X revenue in 12 years and most likely will have earnings that follow. We’ll see.
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