Semiconductor Stocks: Is Artificial Intelligence More Steak or Sizzle?

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Aided in large part by Nvidia Corporation (Ticker: NVDA) and its ascent into the rarified $1 trillion market capitalization club, broader gauges of semiconductor equities have been impressive through the first half of 2023. As of June 15, the ICE Semiconductor Index* is up nearly 48% year-to-date. Much of that momentum is attributed to artificial intelligence (AI) – a theme that’s captivated investors this year. Thanks in part to the rapid adoption of ChatGPT and other tools, AI is garnering plenty of attention in the mainstream press but investors are right to ponder what the other near-term catalysts for chip stocks are.

More Than Nvidia

As seen in the table below, Nvidia was the largest component in the ICE Semiconductor Index as of the end of the first quarter and the stock’s weight in that benchmark has only increased as its share price has done the same.

To view the most recent list of the Index’s top 10 holdings, please click here.

In other words, traders making bullish wagers on broader chip indexes may like to see contributions from names beyond Nvidia. Other companies, including Broadcom, Advanced Micro Devices and Qualcomm, among others, have exposure to AI.

Likewise, AI isn’t the sole catalyst among disruptive technologies stoking semiconductor demand. Other sources include 5G, electric vehicles, Internet of Things (IoT), renewable energy, and more.

Believe It or Not, Personal Computers

There were times, including the 1990s and earlier this century, when personal computers (PCs) were among the leading drivers of demand for semiconductors. PCs still account for a significant chunk of global chip demand but this isn’t the glamorous source of semiconductor consumption it used to be. Glitz aside, a new commercial upgrade cycle, driven in part by AI, could drive elevated purchases of new PCs.

“Commercial entities are much more regular when it comes to upgrades and they need greater memory capacity and compute power to handle their ever-expanding workloads, especially as we think about the potential for A.I. workloads at the edge,” notes Erik Woodring, Morgan Stanley tech analyst.

The Earnings Catalyst

Earnings season also looms large for the semiconductor sector, which can help set the pace of the overall tech sector. As of May 31, just two of the 11 GICS* sectors experienced increases in earnings per share* (EPS) estimates. Those sectors were technology, the home of semiconductor equities, and communication services, a group loaded with chip consumers. Earnings reports could be just what the doctor ordered to jolt chip equities anew.

Sector heavyweight Nvidia is expected to report quarterly earnings in late August. Wall Street consensus estimates as of June 16 were for earnings of $2.50 a share, up from 51 cents in the year-ago quarter. Texas Instruments (NASDAQ: TXN) is earlier on the calendar with quarterly results expected to cross in late July.

And until the earnings deluge, traders may want to circle the Semicon West conference July 11-13 for any potential market-moving headlines.

Bull & Bear Trades on Semiconductor Stocks

Aggressive traders looking to potentially amplify short-term gains in either direction, may consider the Direxion Daily Semiconductor Bull (SOXL) and Bear (SOXS) 3X Shares. The Funds seek daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), respectively, of the daily performance of the ICE Semiconductor Index. There is no guarantee the funds will meet their stated investment objectives. Below is a daily chart of SOXL:

Source: Bloomberg Data (TradingView.com), as of June 15, 2023.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com. For standardized performance click here.

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Neither Rafferty nor the Direxion Daily Semiconductor Bull 3X Shares and the Direxion Daily Semiconductor Bear 3X Shares (the “Financial Products”) are sponsored, endorsed, sold or promoted by Interactive Data Pricing and Reference Data, LLC or its affiliates (“Vendor”). Vendor makes no representation or warranty regarding the advisability of investing in securities generally, in the Financial Products particularly, or the ability of the ICE Semiconductor Index to track general financial market performance. VENDOR MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE ICE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL VENDOR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

ICE Semiconductor Index (ICESEMI) is a rules-based, modified float-adjusted market capitalization-weighted index that tracks the performance of the thirty largest U.S. listed semiconductor companies. One cannot directly invest in an index.

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