Tech stocks have had a volatile 2014, but one subset of technology investments that has been going strong is the semiconductor space.
The surge for this group of tech stocks has been a one-two punch of low expectations a year or two ago coupled with better-than-expected results lately for some of the big players in the space.
Check out these results for some select semiconductor companies:
- Texas Instruments Incorporated (TXN) — up 18% in the last 12 months, vs. 11% for the S&P 500
- Applied Materials, Inc. (AMAT) — up 20%
- NVIDIA Corporation (NVDA) — up 20%
- Intel Corporation (INTC) — up 37%
- Micron Technology, Inc. (MU) — up 83%
Of course, it hasn’t been smooth sailing for all tech stocks in this sector. Advanced Micro Devices, Inc. (AMD) is down 17% in the last 12 months despite gains for the broader market and significantly better returns for other semiconductor companies.
So what’s next for tech stocks like Micron that have been flying high? And should we expect battered picks like AMD stock to come back in the months ahead?
Semiconductor Companies Will Flat-Line
As mentioned, semiconductor stocks have been buoyed by better-than-expected demand, particularly in the laptop and desktop space.
Remember that whole post-PC age people were talking about thanks to the rise of smartphones and tablets like the iPad? Well, apparently the death of the computer has been exaggerated because semiconductor companies have been providing plenty of chips to computer manufacturers in the last few years.
Consider that the iShares PHLX Semiconductor ETF (SOXX) — an exchange-traded fund that contains the biggest names in the space — is up 23% in the past 12 months and has roughly doubled since its most recent low in October 2012.
But improving market dynamics are now priced in, and stocks that were once bargains may not be any more.
Remember, just because PC sales have stabilized doesn’t mean that there’s a lot of growth for the sector in 2015. I, for one, am not convinced that recent Intel earnings indicate a recovery in computer sales … and I think it’s a big leap of faith to presume a modest revenue increase vs. low expectations is a sign that the PC is “back.”
Furthermore, the cost savings thanks to cutbacks made during the Great Recession and during fears of mobile disruption are starting to run out of effect. There are always ways to cut deeper, as evidenced by Intel announcing plans to kill 5,000 jobs earlier this year as its top line remained challenged. But cost-cutting cannot be confused with growth.
The bottom line is that the big guys like INTC will continue to do OK, thanks to massive scale. And investors who bought dividend payers like Intel stock or Qualcomm (QCOM) at a decent price could continue to see decent returns thanks to the income from their investments and future dividend growth.
But if you’re looking for outperformance to continue in semiconductor stocks, it’s not likely. I think many investors are reading too much into the strong performance of semiconductor companies over the last year or so, and it might be time to trim back on your positions if you own AMD stock, Micron or Intel stock.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.