Cloud is the story of the decade, but you don’t have to invest in cloud to profit from it.
Before clouds can do their magic, they must be built. Clouds are built of semiconductors. So my pick for the best exchange-traded fund (ETF) of the year, the VanEck Vectors Semiconductors ETF (NYSEARCA:SMH), remains a stellar play.
SMH is up 5.1% so far in 2018, easily outpacing the 1.35% gain in the S&P 500. It will continue to do well because clouds need chips.
SMH owns the chip stocks that cloud companies buy from. It owns Nvidia (NASDAQ:NVDA) and Micron (NASDAQ:MU). It owns two of the largest chip manufacturers, Intel (NASDAQ:INTC) and Taiwan Semiconductor Manufacturing (NYSE:TSM).
If you’re looking to build a portfolio with safe ETF investments, you should look to SMH.
The Cloud SuperCycle and SMH
Cloud capital spending is in overdrive right now, hitting $27 billion in the first quarter alone.
Most of the spending comes from the firms I call the “Cloud Czars” — Apple (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB).
Their huge capital budgets are driven by cash flow. They’re not borrowing to build. The money is in the bank. This makes the cloud boom highly sustainable. So long as the Cloud Czars rake in the chips, they’ll be buying chips.
While the Cloud Czars are going global, with Microsoft now serving Australia and Google announcing a project in Switzerland, the bigger story is the upgrade cycle.
Clouds were originally built with the cheapest possible chips and open source software, to generate a great price-performance. Now they’re being upgraded to serve artificial intelligence applications, with memory and graphics chips coming to the fore. That’s why Micron and Nvidia are the stars of the chip show.
But you don’t have to be brilliant to be raking it in with chips these days. Intel ignored what I called CEO Brian Krzanich’s insider trading last year, finally jettisoning him on June 21 over a sexual relationship with an employee.
Intel is threatening to become the Hewlett Packard of this decade, a once-great company brought low by lazy management, but it doesn’t matter. The Intel board should be under intense pressure to get it right, but continuing success is blinding them to the internal rot. The shares are up 15% in 2017, 52% over the last year, and are at their highest point since the dot-com era busted at the start of the century.
What Comes Next
Beyond the cloud, semiconductor companies are facing another SuperCycle in 5G.
Faster mobile service will require enormous capital investments in wireless networks, and after that in client devices, assuring companies like Qualcomm Corp. (NASDAQ:QCOM), another key SMH holding, of profitable business for years to come.
In the past you might assume that trade wars or rising interest rates, an economic downturn, would do in the semiconductor sector. But the cash hoards of companies like Apple and Google assure that they can keep spending even in the event of a downturn.
It’s true a trade war would hurt. It’s true that China has many of the chip plants the SMH companies depend upon for supplies. But even here, many semiconductor companies now have diverse supply chains in such countries as Singapore and Malaysia.
Even a real war would only move demand from clouds and devices to guns and satellite systems. Guns and butter, foreign or domestic, cloud or devices, however the market goes, SMH ETF’s companies look like they have clear sailing.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and MSFT.
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