Companies in the Semiconductor – General industry are at the forefront of the ongoing technological revolution based on HPC, AI, electrified and automated driving, IoT and so forth. The semiconductors they produce enable the cloud to function and help analyze data into actionable insights that can be used by companies to operate more efficiently.
Given the strong growth outlook, share prices continue to soar, leading to rich valuations. Despite this, companies like SCREEN Holdings (DINRF) and NVIDIA Corporation (NVDA) and are worth considering.
While there were initially some negative forecasts from economists and market watchers alike, 2023 turned out to be stronger than initially expected and a recession if any this year is also likely to be mild. Semiconductors and technology in general perhaps constitute one of the pillars balancing out an otherwise moderate economy.
The latest data coming out of WSTS, which is also typically quoted by the Semiconductor Industry Association (SIA), has global semiconductor sales growing double-digits this year, with memory doing most of the heavy-lifting with its 76.8% increase. It is expected logic would also do its part, with a 10.7% increase being nothing to scoff at.
As expected, the Americas will be one of the bright spots this year. With US GDP expected to come in at an optimistic 2.6%, the difference is clear for all to see. Garter also sees a 17.4% increase this year coming on top of an 11.7% decline last year with memory being the main driver. IDC hasn’t refreshed its estimate of 20% growth in 2024, although it has identified HBM and AI PCs as the major drivers followed by recovery in auto and industrial demand in the second half of the year.
As far as end-markets are concerned, growth in PCs and smartphones will come from new AI-enabled versions starting this year. PC growth will also be driven by the end of support for Windows 10. Commercial and enterprise deployment should also increase as a recession if any is likely to be mild.
Driven by Internet connectivity across the developed and developing worlds and supportive technology such as sensor networks and AI adoption, the IoT market is also expected to grow steadily over the next few years. Future Market Insights expects the industrial IoT segment alone to grow at a 12.1% CAGR between 2023 and 2033.
Auto electrification, structural changes in industrial automation, data center strength, generative AI and custom chips for cloud services are expected to drive multi-year growth in semiconductors. While in the past, memory demand has been tied to PCs and servers, which is the main reason for the pandemic-related imbalance in 2023, auto and other applications will accelerate in the coming years.
The government’s target of reducing dependence on China, and onshoring projects with national security implications will shape the future of this industry.
About The Industry
The companies grouped under the Semiconductor – General category produce a broad range of semiconductor devices, both integrated and discrete, like microprocessors, graphics processors, embedded processors, chipsets, motherboards, wireless and wired connectivity products, DLPs and analog, serving multiple end markets. It includes companies like NVIDIA, Texas Instruments, Intel and STMicroelectronics.
Major Themes Shaping the Industry
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The long-term outlook for the industry has been robust for a while now because of its being on the building-block side of technology, which makes it crucial for the proliferation of the Internet and the ongoing digitization of every aspect of life. However, throughout this year, the short-term outlook has continued to brighten. With interest rates starting to come down and demand side factors such as inflation coming under control, we can finally focus on industry specific issues. These too are looking up with the inventory imbalance corrected, AI-enabled end point devices coming to market this year, surging infrastructure demand stemming from the rapid adoption of generative AI and continued acceleration of electronics adoption in a faster-growing defense market. While global economies are only gradually returning to normal, geopolitical concerns should not be considered totally negative for the industry, as weapon sales are accelerating the world over.
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There is continued strength in emerging areas like AI and machine learning, IoT, and automotive. Data-intensive applications, advancements in machine learning algorithms and increasing urbanization, as well as dynamics in the auto and financial services markets are the major drivers. Automotive electronics is an area of evolving needs, as the world continues to move toward EVs and hybrids. The most important growth segments for semiconductors are likely to be ADAS, infotainment and electronic control units (ECUs) with safety and fuel efficiency being top concerns. Automation and robotics, with increasing adoption across industrial operations, are other areas of growth. It is hard to set any figure as an expected growth rate, as these expectations continue to accelerate rapidly. Suffice it to say that emerging areas will drive strong double-digit growth for this industry over the next decade.
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Semiconductor supply chains are adjusting. Semiconductor supply chains have become increasingly efficient over the years. While this has brought down cost, the just-in-time model has made the supply chains relatively unreliable in case of external disruptions, as happened during the pandemic, or when China imposed its zero tolerance COVID shutdowns. This, along with other factors, such as the U.S.-imposed restraints on dealing with China is leading semiconductor companies to diversify their supply chains and reduce their dependence on the country. This is an ongoing process that will take several years. In the meantime, there is a growing concern that all the most important leading-edge chips are currently made in Taiwan, a country that China threatens to annex all the time. Since this has national security implications, there is an ongoing drive to onshore manufacturing. The CHIPS Act is facilitating the process.
Zacks Industry Rank Indicates Risks Despite Prospects
The Zacks Semiconductor-General Industry is a stock group within the broader Zacks Computer and Technology Sector. It carries a Zacks Industry Rank #177, which places it in the bottom 29% of the 250 odd Zacks-classified industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates that near-term prospects are moderate. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of 2 to 1.
An industry’s positioning in the top 50% of Zacks-ranked industries is normally because the earnings outlook for the constituent companies in aggregate is relatively strong. The opposite is true for stocks in the bottom 50% of industries. In this case, the aggregate earnings estimate for 2024 is up 33.5% from the year-ago level while the aggregate earnings estimate for 2025 is up 78.8% from last year.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Stock Market Performance Remains Strong
Tracking the performance of the Zacks Semiconductor – General Industry over the past year shows that the industry has traded at a premium to both the broader Zacks Computer and Technology Sector and the S&P 500 index throughout the year with a sizeable bump-up through May and the first half of June.
The industry has gained 122.4% over the past year. The broader technology sector gained 32.7% while the S&P 500 index gained 26.2%.
One-Year Price Performance
Image Source: Zacks Investment Research
Current Valuation: Rich
On the basis of forward 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at a 36.76X multiple, which is its median value over the past year. However, since the S&P 500 trades at 21.55X while the sector trades at 25.94X, the industry appears significantly overvalued.
Its worth noting that the industry has traded much closer to the sector in the last 10 years, trailing it at first then slightly beating it. But it has really pulled ahead from the middle of 2022, most likely because companies are scrambling to acquire the basic building blocks for AI, autonomous driving, defense and other mega trends driving the market today.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
2 Stocks to Consider
The industry continues to look good and it will benefit from further interest cuts this year, which typically drives more money into risky assets. Several of the technology heavyweights in this industry are the backbone of how computing is done these days, so we remain optimistic over the long run. The only stumbling block is the valuation. We continue to like DINRF and NVDA:
SCREEN Holdings Co Ltd. (DINRF):
Headquartered in Kyoto, SCREEN Holdings develops, manufactures, sells and maintains semiconductor production equipment in Japan.
SCREEN Holdings’ earnings estimate for the year ending Mar 2025 increased 23 cents (4.7%) in the last 60 days while its 2025 estimate increased 20 cents (3.6%).
The shares of the Zacks Rank #2 (Buy) company have appreciated 45.4% over the past year.
One-Year Price Performance: DINRF
Image Source: Zacks Investment Research
NVIDIA Corp. (NVDA): Santa Clara, CA-based NVIDIA provides graphics, and compute and networking solutions in the U.S., Taiwan, China and other markets. Its graphics processing units (GPUs) are the most popular in the gaming segment. NVIDIA is also at the leading edge of enterprise, data center, cloud and automotive deployments today.
Generative AI is driving exponential growth in compute requirements. Because NVIDIA’s accelerated computing is versatile, energy-efficient and has low total cost of ownership, companies are rapidly transitioning to its products to train and deploy AI. NVIDIA GPUs, CPUs, networking, AI foundry services and NVIDIA AI Enterprise software are all growth engines. They are opening up opportunities and leading to broad-based growth across geographies and markets.
The automotive, financial services, healthcare and telecom verticals are particularly strong, as AI and accelerated computing are quickly becoming integral to customers’ innovation road maps and competitive positioning. The data center business is the strongest right now, driven by demand for data processing, training and inference from large cloud-service providers and GPU-specialized ones, as well as from enterprise software and consumer internet companies.
NVIDIA is also seeing momentum across professional visualization and automotive. The company also gives away billions to shareholders in dividends and share repurchases.
The Zacks Consensus Estimate for fiscal the fiscal year ending January 2025 is up 11 cents (4.1%) in the last 30 days and up 33 cents (9.8%) for the following year.
The Zacks Rank #3 (Neutral) rated stock is up 173.6% in the past year.
Price & Consensus: NVDA
Image Source: Zacks Investment Research
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