Semiconductor stocks have been volatile. Last Friday, the VanEck Semiconductor ETF fell 11.6% in a day. Overall, the index has plunged 26% since mid-August, including Friday’s declines. Before that, the index was going through wild swings, first diving in July before recovering in early August, then tumbling again. The ETF is still up about 27% year-to-date, however. Investors might be wondering: What’s the outlook for semiconductor stocks — which have been boosted by artificial intelligence — and are there pockets of buying opportunity? In a report released Tuesday, Morningstar said demand is set to continue improving, while memory prices and profit margins are in the middle of a recovery phase. It expects orders for PCs and general servers to improve next year as AI-driven demand picks up. As for memory chips, supply is set to remain tight at least till the first half of 2025, thanks to investments in high-bandwidth memory, Morningstar said. “In order to protect themselves from cash burn, memory suppliers, especially SK Hynix and Micron Technology, have significantly reduced their capital expenditures in 2023. We expect memory companies to increase their capex in 2025, supported by the improved profitability and improved capex of US hyperscalers,” Morningstar analysts wrote. But pockets of value still exist, according to the firm. Top stock picks Its top picks include Taiwanese firms TSMC and GlobalWafers. It describes the former as a “primary” AI beneficiary, being “immune” to shifts between cloud AI and edge AI as both depend on TSMC. Edge AI involves running AI algorithms directly on a user’s device, be it a smartphone, laptop or wearable, among other things. GlobalWafers has a “head start” in the United States, and is a “catchup play” that benefits from growing silicon wafer demand, said Morningstar. “Wafer producers’ performance lag their customers’ by about two quarters, as customers stock up only when the market is booming,” it said. “We expect sentiment to improve as electric vehicles, industrials and other non-AI applications recover in the second half of 2024.” Morningstar sees TSMC and Samsung as particularly undervalued — even after strong one-year returns — attributing the potential for more returns to their “outsized exposure” to AI and other advanced semiconductors. It also believes GlobalWafers shares trading at 16 times 2025’s price-to earnings is undervalued. Sentiment is “rock bottom,” but the company is becoming more successful at managing rising labor and energy costs, it said. Screen CNBC Pro also screened the Van Eck Semiconductor ETF for stocks in the list that analysts predict still have more than 20% upside, and has a buy rating of 50% or more. These stocks turned up.
