Semiconductor stocks look up after a rough 2022. The iShares Semiconductor ETF is up 11% this year, in stark contrast to the index’s 35.8% decline in 2022. The once-booming sector has faced a downturn over the past year amid dwindling demand for consumer products like smartphones and PCs ; supply chain disruptions; and broad risk-off sentiment in the stock market. Now, however, investors appear to be heeding the advice of several Wall Street pros, who have urged them to take a longer-term view of the sector given chips’ importance to several key long-term trends. Electric Vehicles One such trend is the growing popularity of electric vehicles. Semiconductor chips are an important part of electric vehicles, which is why veteran fund manager Trent Masters is bullish on Arizona-based semiconductor supplier ON Semiconductor. “65% of the business is auto and industrial focused and while there is this incredible volatility in the half-cycle, particularly around memory, there is a lot of content gains on the auto side that are helping to defuse that cycle” , Masters, portfolio manager at Alphinity Investment Management, told CNBC Pro Talks last week. He added that the company will benefit from gains in electronic content as consumers switch from traditional internal combustion engine vehicles to electric vehicles, as well as from the shift to assisted and autonomous driving. Masters said a driver-assisted conventional vehicle has approximately $150 worth of electronic content, while a Level 5 autonomous vehicle has approximately $1,600 worth of electronic content. “It’s their content story that offers a degree of separation from the broader auto cycle and a degree of resilience in terms of revenue. In terms of her previous execution, she’s been flawless,” he said. FactSet data shows that more than 70% of analysts covering the stock give it a “buy” rating, with an average upside potential of 13.7%. A “completely unique” Business Masters is also a fan of the Dutch chip company ASML. “It’s one of the few companies that is absolutely unique in terms of its ability in advanced lithography, being able to sketch these cutting-edge chips and allowing those chips to get smaller and smaller,” he said. The company sells ultraviolet lithography machines needed to manufacture the most advanced chips to semiconductor manufacturers such as Taiwan Semiconductor Manufacturing Company for US$200 million. As the only company in the world with the ability to manufacture such machines, ASML enjoys “very high” gross margins and an “incredible” market position, according to Masters. He described the company’s supply chain management as exceptional, and while demand for semiconductor chips could remain volatile in the near term, he sees the business growing at a 15% compound annual rate over the next three to five years. “We also have a very solid growth outlook through 2030 because they’re working on the next technological advancement,” Masters said. About 84% of analysts think the stock is a Buy, giving it an average upside potential of 15.1%, according to data from FactSet.
