The good news keeps flowing for semiconductor stocks…
And it’s far from over.
Regular readers will recall that Congress passed the CHIPS and Science Act last August. It promises nearly $53 billion in subsidies to boost U.S. semiconductor (or “chip”) production.
U.S. chipmakers need that money…
In 1990, the U.S. owned nearly 40% of the global chip market. Today, it’s only 12%. The CHIPS and Science Act aims to reverse that trend.
Of course, artificial intelligence (“AI”) is also front and center these days. And we can’t live in an AI-dominated world without a ton of semiconductors.
On May 24, AI-related strength led chipmaker Nvidia (NVDA) to boost its earnings guidance. And in turn, the company’s full-year consensus earnings-per-share estimates jumped 73%.
We’re seeing strong growth in other areas as well. Big Data, autos, 5G communications, health care, defense, and alternative energy are all hot new sources of demand for chips.
Investors are taking notice. And semiconductor stocks are outperforming…
The iShares Semiconductor Fund (SOXX) is up roughly 52% so far this year. Meanwhile, the benchmark S&P 500 Index is only up around 18%.
Now, after that type of outperformance, you might expect things to cool off. After all, nothing goes up in a straight line forever.
But when it comes to semiconductor stocks… don’t bet the farm on that just yet.
Let me explain…
So far, we’ve only focused on chips themselves today. But that’s not the whole story. And it all comes down to a simple mantra…
“Chips don’t float.”
You see, chips only do the incredible things we’re used to after they’re anchored to something. They’re just tiny, useless pieces of silicon if they’re floating on their own.
First, they need a “substrate.” This film sets the pattern between chips. It also connects chips electrically to one another and to a printed circuit board (“PCB”) underneath.
Here’s the problem…
The U.S. depends even more on foreign-made PCBs and substrates than foreign-made chips.
Around 90% of the global PCB supply comes from Asia. And 56% comes from China alone. U.S. market share totaled roughly 30% two decades ago. Today, it’s only 4%.
So even if we make enough chips to solve future supply-chain bottlenecks, it won’t help us.
We’re still badly exposed to a PCB shortage. And we’re especially concerned about escalating global tensions that might lead to an embargo.
Congress first tried to fix this problem in the spring of 2022. It introduced the Supporting American Printed Circuit Boards Act. But that proposed bill died without a vote.
Now, Washington is going back to work…
President Joe Biden invoked the Defense Production Act in March. That move will lead to $50 million spent on domestic and Canadian PCB production.
Then, on May 11, Congress introduced the bipartisan Protecting Circuit Boards and Substrates Act of 2023. The bill would set aside $3 billion toward new capacity. And it would give a 25% tax credit to buyers of American-made PCBs and substrates.
My point is simple…
The good news will keep coming for semiconductor stocks. And that makes it extremely hard for industry bears who want to argue that these stocks can’t keep going higher today.
The Power Gauge agrees with me, too. It remains “very bullish” on SOXX and many individual stocks within this space.
So for now, we’ll stay the course.
Good investing,
Marc Gerstein
P.S. Speaking of chipmakers, the Power Gauge rates Nvidia as “bullish” today. But the system notes some concerns when it comes to its Financials and Earnings categories.
So is Nvidia a good buy right now? Or should you play the hot AI market in better ways?
They’re among the topics that Chaikin Analytics founder Marc Chaikin will discuss during “The 2023 AI Race” event this evening. It’s 100% free for all Chaikin PowerFeed readers.
Make sure you reserve your spot right here. Then, tune in at 8 p.m. Eastern time.
