I just want to [do a] timely talk about semiconductor stocks, because the industry benchmark – the Philadelphia (PHLX) Semiconductor Index – has had a 17% correction in recent weeks, [declining] from its early-March peak [to the time of recording on 24 April 2024].

Several companies have now reported good Q1 results, with good outlooks – including Texas Instruments and ASM International overnight, and Nordic Semiconductor this morning. They are, of course, different parts of the semiconductor value chain. On the equipment [side], we have this leading provider of analog chips with a very wide range of industrial and automotive applications, and Nordic Semiconductor in the consumer electronics area.

But one thing unites them. And that is statements of expecting and seeing clear signs for recovery in their markets in the second half of this year [2024]. Let us not forget, the general semiconductor cycle only troughed in May 2023. Growth rates have since gotten less bad; but are still negative. And only in recent months have they gone just about into positive territory, year-over-year.

But we are still far from a proper, strong recovery. As usual, the more cyclical subset of memory had entered and exited the downcycle first, with all other semiconductor types following on with significant time delays, as usual.

But on average, the [last] semiconductor upcycle lasted about two-and-a-half years. The sector downcycle that preceded it was also longer, timing wise, and deeper in magnitude than average. So maybe there is a chance that the resulting upswing could now be even longer and higher.

Many of the companies that we meet with in the sector are confident that 2025 and 2026 will be strong growth years. Sharply rising demand for new memory technology, together with the mega-AI server trend taking off; there’s a healthy technology upgrade cycle looming in the wings for PCs and smartphones, making us optimistic for the next few years.

So, we see a very good chance [growth] won’t peak for some time into 2026. As we know, stock markets are always early to look through the peaks and troughs, and rarely more so than in semiconductors. The market typically reacts one to two quarters before the effects are obvious. But that sort of timeline still gives us really ample runway for this investment theme to play out.

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Glossary

Cyclical: In this case, meaning parts of the semiconductor industry that are more sensitive to changes in the economy, or underlying demand.

Downcycle: A period in an industry or economy where there is less activity, or when prices or valuations are falling.

Growth rates: Here meaning the change in earnings for a business over time, negative growth representing a fall in earnings.