It didn't take much to see a change in one of the worst performing sectors in the technology room last year.
Chipmaker's shares, which benefited from the exploding use of smartphones, cloud computing and huge investments in data centers by & # 39; the world's largest technology companies, are quickly regaining their lost ground this year with some of the shares on the move to place their best profit in the first quarter in more than two years.
NVIDIA (NASDAQ :), the largest maker of graphics card chips in the industry, has so far risen by 28% this year, while Advanced Micro Devices (NASDAQ 🙂 has seen its stock increase by more than 36% .
The benchmark made more than 26% gain in 2019, outperforming the strong increase of 14%. This fast and powerful rally in chip shares is causing confusion among investors, as many of the negative factors that tumbled these shares last year are still lurking.
PHLX Semiconductor Index, Weekly
For example, the United States and China are still working on a trade agreement that may not be good for the way the markets expect. US President Donald Trump said yesterday that he does not intend to suspend trade rates for China until he is certain that Beijing fully complies with all possible trade agreements.
Semiconductor companies have linked much of their growth to China, where spending on gaming and artificial intelligence has fueled demand for their products. A slowing global economy, in particular a more pronounced slowdown in China, will continue to keep demand under pressure this year. The S&P 500 semiconductor group predicts a drop of 24% in the first quarter results of a year earlier, compared to an expected drop of 3.6% for, according to FactSet.
Powerful rebound of chip makers
A possible explanation for the powerful comeback of chip makers is that some companies have resumed the hope of an early recovery after producing better-than-expected results in the fourth quarter and predicting strong demand for their products. AMD, the second largest maker of computer processors, which met analysts' expectations and predicted a positive expectation for 2019.
Some investors have found a good reason to buy Nvidia shares after the company did not outperform analysts' expectations following a previous warning from Chief Executive Jensen Huang, who was a real blow to the fourth quarter. stomach & # 39; saw produce
Despite this impressive revival, we continue to have doubts about the sustainability of this rally. Investors should not forget that the global economy is still vulnerable and is being held hostage by US trade negotiations. A scenario in which demand could rise quickly for chip producers is too optimistic.
Buying shares from Nvidia and AMD, the two leading winners this year, also entails additional risk for long-term investors, given the highly cyclical nature of their products and the excessive volatility of their shares . For example, Nvidia lost more than half the market value last October between October and December last year for signs that the two main markets, gaming and data centers, are slowing down.
If you want to take a position in the semiconductor sector, we find Intel Corp (NASDAQ :). a more sustainable long-term bet. With a price-earnings ratio of around 11, close to the lowest ratio since 2015, and a dividend yield of around 2.33%, Intel looks attractive to long-term investors.
In our opinion, Intel has more power to support long-term weakness in demand with a market share of around 99% for memory chips running servers, the machines that businesses and individuals need to operate the internet and large networks
Bottom Line
Investing in chip stocks after a powerful relief rally makes no sense, especially when the threats to their growth have not completely disappeared. Any negative development of trade negotiations between the US and China, more bad news about the Chinese economic front and a possible slowdown in US expansion are some of the headwinds that call for the avoidance of semiconductors in general. That being said, we believe that Intel shares offer a better risk / reward preposition for long-term investors than highly cyclical Nvidia and AMD shares.
