An article published on MarketWatch highlighted an analyst’s claims that chip inventories are at multi-year highs. This along with Qualcomm’s litigation case related to Korea Fair Trade Commission ruling weighed on the U.S. semiconductor sector.
VanEck Vectors Semiconductor ETF (MUTF:SMH), PowerShares Dynamic Semiconductors ETF (NYSEARCA:PSI) and iShares PHLX Semiconductor ETF (NASDAQ:SOXX) lost in the range of 1.2% to 1.4% on the day. However, investors should note that this is a short-term or almost negligible blip as several positive factors are in play.
Investors can very well use this dip as a buying opportunity to the broader semiconductor sector, relying on the below-mentioned factors:
The Semiconductor Industry Association (SIA) recently announced that global sales of semiconductors were $33.6 billion in Jul 2017, marking a year-over-year gain of 24% and a sequential rise of 3.1%. All the key geographies registered both year-over-year and month-over-month increases in July, and the Americas market were at the forefront with year-over-year growth of 36.1% and a sequential rise of 5.4%.
Usage of Semiconductor in Cryptocurrencies
Bitcoin is on a tear this year. The digital currency has now more than quadrupled in value from around $997 at the start of the year. Bitcoins are ‘mined’ by using a greater amount of computer processing power. Creation and transactions in bitcoin are controlled through cryptography to keep transactions secure.
Like bitcoin, Ether or etherum is also popular this year. Now, mining of cryptocurrencies needs the usage of semiconductors. A hardware known as an ASIC (Application-Specific Integrated Circuit) has been designed exclusively for mining bitcoin. This where semiconductor companies can gain traction.
As per Bloomberg, there was a 10-fold rise from April to June in the Ethereum market which helped shares of Nvidia Corporation (NASDAQ:NVDA) and Advanced Micro Devices, Inc. (NASDAQ:AMD) substantially. Barclays recently added that Nvidia is better placed than its competitors to cash in on the cryptocurrency rally.
DRAM/NAND Supply/Demand Dynamics
DRAM and NAND prices have improved primarily due to higher-than-expected demand for PCs. It is a really promising area for the semiconductor market.
In the early phase of the year, HP Inc (NYSE:HPQ) hinted that there may be a shortage of DRAM and Flash memory chips. Notably, NAND flash memory chips are also used in smartphones and tablets. With rising adoption of smartphones, especially in emerging markets, demand for NAND chips are self-explanatory.
In any case, semiconductor is the value-centric traditional tech area that is likely to have an upper hand in an edgy investing environment. Moreover, the semiconductor space is consolidating rapidly with a number of deals announced lately.
Favorable Zacks Ranks
The Zacks Sector Rank is in the top 44%. While semiconductor stock Applied Materials Inc.’s (NASDAQ:AMAT) Zacks Industry Rank is in the top 2%, Micron Technology Inc.’s (NASDAQ:MU) Zacks Industry Rank is in the top 1% and NVIDIA Corp.’s Zacks Industry Rank is in the top 1%. Moreover, PSI, SMH and SOXX have a Zacks Rank #1 (Strong Buy).
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