Remember just a few years ago when the semis were a dead sector, bedraggled by Apple margin squeezing tactics? I think the turning point came when Broadcom merged with Avago. Since about that time, the sector has been white hot — with monstrous gains found in NVDA, SWKS, TER, LRCX and many others.
Is the sector expensive?
The semiconductor equipment sector is trading at 27x earnings, on a media basis. On a price to sales basis, it’s trading just 2.11x. But the premium to the technology sector, according to Exodus, has shrunk from +47% in 2015 to just +8% now — thanks to a ramp up in earnings. In other words, the sector is appreciably cheaper now, on a p/s basis than it was in 2015.
To be fair, all of the other sub-sectors in the semis, such as broadline, memory, specialized and integrated, are trading at or near the high end of their historical ratios. Only the semi equipment sector is considered cheap. Even with that ‘cheapness’, the sector was appreciably cheaper, when compared to the overall tech sector, back in 2012.
Convoluted, isn’t it?
Ultimately, the tech sector is guided by the semis, whose market caps total more than $1.1t, matching the application software sector. Whenever the tech sector cascaded lower, it was led by either software or semis.
Here are is the tech sector performance, year to date, broken down by industry.
This is almost a useless shitpost. But I think it’s important to acknowledge how important the semis are to the market — as we head into earnings season. If they reaffirm expectations and impress, we’re likely going to enjoy another leg up in the Nasdaq. If they disappoint, a la 2014, things can unravel very fast — since these stocks are already owned by every cocaine addled money manager in America.
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Well, if you think Nasdaq will benefit from semis, then why not load up on the big five like Apple, Amazon, Facebook, Microsoft, Alphabet which are nearly 15% of Nasdaq and accounted for 45% of recent gains and just ride it?
Somewhat like the FANG trade. Not the stock named that– the group of stocks whose names begin with those letters– what was it? FB, AMZN, NFLX, GOOG.
If theres one thing Ive learned over the years with the semi cycles–it is that you buy them when their PEs look expensive, and sell them when their PEs look cheap. All has to do with earnings troughs and peaks.
Interesting. Thanks for that. Will have to check out the semi p/e ratio history.
I’ve made a lot of good with semis like AVGO, LRCX and AMAT. Still good but liking software and services a little better. We can expect continued strong growth from the leading internet companies, driven by a continued shift to mobile and digital advertising. The software companies that are either “cloud-native” or are successfully managing the transition to the cloud like RHT, CRM and SPLK are my top holdings in that space.
AR is the future. NVDA will continue to lead. Fb/goog/amzn will only get bigger.