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What Awaits Semiconductor ETFs in Post-Lockdown World?

Semiconductor ETFs have been feeling the pressure of slowing global growth. However, likely revival of smartphones, steady deployment of 5G and a decent M&A environment may benefit the space. Read More...

The semiconductor industry, which is a relatively value-centric corner of the high-growth technology space, has been steady amid coronavirus-related stock market volatility. However, it has fallen short of its high-growth counterparts like cloud computing, software and Internet.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The largest semiconductor ETF iShares PHLX Semiconductor ETF SOXX has gained about 17% past month (as of May 5, 2020), lower than the tech-heavy Nasdaq-100 ETF QQQ (up 18.7%) and the broader tech ETF XLK (up 18.4%). SOXX has also underperformed WisdomTree Cloud Computing Fund WCLD (up 30.6%), SPDR S&amp;P Software &amp; Services ETF XSW (up 24.6%) and Invesco NASDAQ Internet ETF PNQI (up 21.5%).” data-reactid=”20″>The largest semiconductor ETF iShares PHLX Semiconductor ETF SOXX has gained about 17% past month (as of May 5, 2020), lower than the tech-heavy Nasdaq-100 ETF QQQ (up 18.7%) and the broader tech ETF XLK (up 18.4%). SOXX has also underperformed WisdomTree Cloud Computing Fund WCLD (up 30.6%), SPDR S&P Software & Services ETF XSW (up 24.6%) and Invesco NASDAQ Internet ETF PNQI (up 21.5%).

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="What’s Behind the Underperformance?” data-reactid=”21″>What’s Behind the Underperformance?

Before the COVID-19 outbreak, worldwide semiconductor revenues declined 12.2% in 2019, according to the latest update of the IDC Semiconductor Applications Forecaster (SAF). Decline of 37.3% and 27.7% in the DRAM and NAND flash memory chips that are the key building blocks in smartphones and cloud computing technologies, respectively, after more than two years of strong growth, weighed on the broader semiconductor space.

The virus outbreak is now likely to drag the semiconductor space down by another 4.2% in 2020, per IDC. Excluding the DRAM and NAND flash memory chips, semiconductors are expected to decline by 7.2% in 2020.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Any Hope of a Better Run Ahead?” data-reactid=”24″>Any Hope of a Better Run Ahead?

Certain things are falling into place for the semiconductor space lately. Demand should perk up following the reopening of economies. One beaten-down area — smartphones — thwarted demand for chips in recent times, but should be up for a revival in the coming days.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Smartphones: A Solid Driver Now” data-reactid=”26″>Smartphones: A Solid Driver Now

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Micron Technology MU — one of the world’s largest producers of DRAM and NAND flash memory chips — lately indicated that demand for smartphones in China has started to rebound post coronavirus lockdown.” data-reactid=”27″>Micron Technology MU — one of the world’s largest producers of DRAM and NAND flash memory chips — lately indicated that demand for smartphones in China has started to rebound post coronavirus lockdown.

If the Chinese lockdown model is any guide, one can expect a similar revival in most of the other global economies. Moreover, sales of smartphones should gain steam in the coming quarters as coronavirus-related social distancing has brightened demand for digitization (read: Bet on Digital Payments With These ETFs and Stocks).

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="With the virus uncertainty here to stay for at least a few more months, online activities — both essential and non-essential — would be in the cards and so would be the usage of smartphones. This is great news for semiconductor companies. Apple AAPL CEO Tim Cook also took notice of recovering demand in China through April.” data-reactid=”29″>With the virus uncertainty here to stay for at least a few more months, online activities — both essential and non-essential — would be in the cards and so would be the usage of smartphones. This is great news for semiconductor companies. Apple AAPL CEO Tim Cook also took notice of recovering demand in China through April.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="5G Boom to Aid” data-reactid=”30″>5G Boom to Aid

The 5G boom will play a major role in saving the semiconductor industry in the form of creating demand for microchips. By the end of 2020, 5G handset sales (15-20 million units) should make up about 1% of total smartphone sales, said Deloitte, before the virus outbreak.

Per IDC, “5G volumes will grow this year despite the demand uncertainty, driving strong semiconductor content as OEMs position 5G in lower tiers to broaden the reach. OEMs in China are likely to focus on launching 5G devices to leverage potential subsidies by carriers later this year. There are 5G phones that have started selling for under $300 in China.”

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Decent M&amp;A Environment” data-reactid=”33″>Decent M&A Environment

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="There has been a pickup in mergers and acquisitions.Amid coronavirus-related uncertainties, Intel INTC and Nvidia NVDA announced two acquisitions that can facilitate their existing portfolio (read: "Merger Monday" to Benefit These ETFs).&nbsp;” data-reactid=”34″>There has been a pickup in mergers and acquisitions.Amid coronavirus-related uncertainties, Intel INTC and Nvidia NVDA announced two acquisitions that can facilitate their existing portfolio (read: “Merger Monday” to Benefit These ETFs). 

Intel is buying mobility app Moovit for $900 million, three years after it acquired Mobileye for $15.3 billion. With the addition of Moovit, Intel hopes to build out Mobileye as a “complete mobility provider” with a forecast market of $160 billion by 2030.

And Nvidia said it is acquiring data center networking specialist Cumulus Networks for an undisclosed amount. Nvidia recently closed the $6.9-billion acquisition of Mellanox Technologies Ltd., after it received antitrust approval from Chinese regulators in mid-April.

The semiconductor space had made about 30 acquisitions in 2019, which had a combined value of $31.7 billion, up 22% year over year, according to data compiled by IC Insights, as quoted on evertiq.com. The 2019 value of semiconductor acquisition agreements was the third-highest annual total ever.

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