Navigating the Semiconductor Landscape: Uncovering Opportunities Amidst Volatility

The semiconductor industry has been a rollercoaster ride for investors, with stocks experiencing wild swings and significant volatility. Last Friday, the VanEck Semiconductor ETF plummeted 11.6% in a single day, and the index has plunged 26% since mid-August. However, the ETF remains up 27% year-to-date, leaving investors wondering about the outlook for semiconductor stocks and potential pockets of buying opportunity.

Unlocking the Potential: Navigating the Semiconductor Sector's Volatility

Demand Outlook: Riding the AI Wave

According to a recent report by Morningstar, the demand for semiconductors is set to continue improving, with a particular focus on the growing influence of artificial intelligence (AI). The analysts expect orders for PCs and general servers to improve next year as AI-driven demand picks up. This trend is expected to be a significant driver for the semiconductor industry, as AI applications become increasingly prevalent across various sectors.

Memory Chip Dynamics: Navigating the Supply-Demand Balance

The report also highlights the recovery phase in memory prices and profit margins. Morningstar expects the supply of memory chips to remain tight at least until the first half of 2025, thanks to investments in high-bandwidth memory. To protect themselves from cash burn, memory suppliers, such as SK Hynix and Micron Technology, have significantly reduced their capital expenditures in 2023. However, the analysts anticipate that memory companies will increase their capital expenditures in 2025, supported by improved profitability and the increased capital expenditure of US hyperscalers.

Identifying Pockets of Value: Uncovering Undervalued Opportunities

Despite the overall volatility in the semiconductor sector, Morningstar has identified pockets of value that present potential buying opportunities. The firm's top stock picks include Taiwanese companies TSMC and GlobalWafers.TSMC is described as a "primary" AI beneficiary, as it is "immune" to shifts between cloud AI and edge AI, as both depend on the company's expertise. Edge AI involves running AI algorithms directly on a user's device, such as a smartphone, laptop, or wearable.GlobalWafers, on the other hand, is seen as a "catchup play" that benefits from growing silicon wafer demand. The firm believes that GlobalWafers has a "head start" in the United States and that its performance will improve as the market for electric vehicles, industrials, and other non-AI applications recovers in the second half of 2024.Morningstar also believes that TSMC and Samsung are particularly undervalued, even after their strong one-year returns. The analysts attribute the potential for more returns to their "outsized exposure" to AI and other advanced semiconductors. Additionally, the firm believes that GlobalWafers' shares, trading at 16 times 2025's price-to-earnings, are undervalued, despite the "rock bottom" sentiment, as the company becomes more successful at managing rising labor and energy costs.

Screening for Potential Opportunities

CNBC Pro has also screened the VanEck Semiconductor ETF for stocks that analysts predict still have more than 20% upside and a buy rating of 50% or more. This screening process has identified additional potential investment opportunities within the semiconductor sector, providing investors with a broader range of options to consider.In conclusion, the semiconductor industry has been a volatile landscape, but there are pockets of value and potential opportunities for investors to explore. By understanding the demand outlook, memory chip dynamics, and identifying undervalued stocks, investors can navigate the semiconductor sector and potentially capitalize on the growth of AI and other advanced semiconductor applications.