Semiconductor stocks have gotten hit too hard. The time has come to jump in and buy.
The VanEck Semiconductor Exchange-Traded Fund has fallen 14% to $241 from the record high it hit in mid July, while the S&P 500 has kept on rising.
Now, much of the risk that demand for chips could be hurt as a result is reflected in the stocks’ prices. The ETF is trading close to the range of about $215 to $240 where it has found support all year. Investors keep buying the stocks, recognizing that chip makers’ profits earnings are likely to continue to rise over the long term.
Chip stocks are “oversold,” wrote Jeff deGraaf, head of technical research at Renaissance Macro Research, in a note on Monday.
The semiconductor ETF now trades at 26 times the earnings per share analysts expect the fund’s companies to deliver over the coming 12 months. That is from about 33 times in July and is a bit less than 20% above the S&P 500’s 21.9 times. It is a slim premium versus many moments earlier this year — a signal that valuations are unlikely to go much lower, given that the earnings are expected to grow faster than profits for the broader market.
Nvidia, Advanced Micro Devices, Broadcom, Micron Technology, Taiwan Semiconductor Manufacturing, and the three major chip-equipment makers — Lam Research, Applied Materials, and ASML — comprise the majority of the fund. Customers continue to ramp up their purchases of chips for artificial intelligence, as well as their broader cloud and AI capabilities, so analysts expect earnings to grow at annual rates in the double-digit percentages over the next few years, according to FactSet.
Nvidia is expected to see 35% annual earnings growth over the next couple of years. The stock has held up better than other semiconductor shares, but it is still about flat since mid July, significantly underperforming the S&P 500. Nvidia reports its third-quarter earnings Wednesday.
“NVDA, the ‘hero of our story,’ we would treat any unexpected short term volatility through the earnings report as a buying opportunity for a company that is a long term buy and hold, the true ‘Vanguard of the AI Revolution,’ ” writes Evercore strategist Julian Emanuel.
While investors in the major customers for chips — Amazon.com, Alphabet, Meta Platforms, and Microsoft — are pushing for less aggressive near-term capital spending, “the [chip-making] industry is still in its infancy and expected to have sporadic moments of pause and reflection,” writes Vivek Arya, analyst at Bank of America.
Bank of America analysts expect those four major chip customers to increase their cloud-related capital expenditures by just over 20% next year to about $270 billion. That makes the just over $200 billion in data-center revenue Wall Street analysts expect next year for Nvidia, AMD, and Broadcom look reasonable.
Tariffs are a story for another day, while chip makers’ earnings are growing now. Given that the stocks already reflect at least some tariff-related risk, the shares may have nowhere to go but upward as quarterly reports continue to confirm that earnings can keep moving higher.
If Nvidia’s results and financial forecasts meet or beat expectations, chip stocks may easily pop.