The dark clouds in microchips and the opportunities

The shares of the global industry of chip makers, they are facing two completely different trends. The first trend is related to the increase in demand for chips from companies active in the field of Artificial Intelligence. And the second with the de-escalation of demand for semiconductors for industrial use, due to the slowdown in the economy and growth rates.

So while its stock Nvidia (NVDA) is still bullish mainly due to its specialization in the digital requirements of Artificial Intelligence, other major players in the space such as Taiwan’s TSMC (Taiwan Semiconductor Manufacturing Co) (TSM), SK Hynix (KS:000660) and Samsung Electronics ( KS:0059300) from South Korea and Semiconductor Manufacturing International Corp (HK:0981) and Hua Hong Semiconductor Ltd (HK:1347), have seen their shares fall.

The decline in turnover and profitability of TSMC, Samsung and SK Hynix has also led to a reduction in raw material orders from their suppliers, with demand falling across the entire chip maker ecosystem. The negative news from the Asian companies, comes to follow, the shrinking of the sizes of the American Applied Materials.

A fact that certifies that even in the US things are not progressing in the best way, after the decline in sales of mobile phones and computers. The delay in the development of TSMC’s new $40 billion industrial plant in Arizona, which is part of the “CHIPS and Science Act” programs announced by the White House, is also indicative. And there are not a few analysts who estimate that this emblematic investment may even turn out to be loss-making from time t(0). But Intel’s ( INTC ) Q2 2023 results weren’t particularly satisfactory either, with revenue down 15%, mainly due to the termination of its long-term contract with Apple.

THE World Semiconductor Trade Statistics, estimates that the global chip market will decline by the end of 2023 by 4.1% compared to 2022. Specifically in memory chips the decline is expected to exceed 17% compared to 2022. At the same time, however, American The Semiconductor Industry Association estimates that by 2030 the industry in the US will need more than 115,000 new engineers to staff chip manufacturing companies, without specifying the type of chips that will be in particular demand. The White House wants to move most of the world’s production to the US.

Today just that 12% of the global chip production, is made on American soil, up from 40% in 1990. And the bitter American truth is that 100% of the so-called “state-of-the-art semiconductors”, i.e. high-end semiconductors, are produced outside the USA.

As can be easily understood, tracking the individual stocks of chip companies is quite a difficult task, since each company has its own characteristics that make it vulnerable to developments. Investing through specialized ETFs is the safest option.

At list after ETFs that have the highest assets invested in the semiconductor sector are VanEck Semiconductor ETF (SMH), BlackRock’s iShares Semiconductor ETF (SOXX) and State Street’s SPDR S&P Semiconductor ETF (XSD) with $10 billion, $8.8 billion and $1.4 billion respectively.

In terms of returns, the VanEck Semiconductor ETF (SMH) has gained +44.86% year-to-date, the iShares Semiconductor ETF (SOXX) +38.82% and the Invesco PHLX Semiconductor ETF (SOXQ) +38.52 %.

For more aggressive long investors, there are ETFs that offer leveraged positions. So GraniteShares 1.5x Long NVDA Daily ETF (NVDL) with 1.5x leverage has returned +360.91% year-to-date, ProShares Ultra Semiconductors (USD) with 2x leverage is showing gains + 139.37% and Rafferty Asset Management’s Direxion Daily Semiconductor Bull 3x Shares (SOXL) with 3x leverage, shows +105.23% year-to-date gains.

For investors looking to take leveraged short positions in chips, an alternative is Rafferty Asset Management’s -3x leveraged Direxion Daily Semiconductor Bear 3x Shares (SOXS), which has posted losses of -71.57 this year %, since the beginning of the year.