On The Rock

Top Themes of the Week

Happy Sunday,

I believe the semiconductor industry has entered a new, stable and less cyclical phase. The value chain is able to better predict silicon consumption, respond to perturbations in supply/demand, and more efficiently plan output. As a result, volatility in semiconductor supply/demand and semiconductor equipment spending has muted significantly.

Compare this to 15-20 years ago when unit growth rates were +15% YoY – small disruptions in supply/demand would drive significant swings in inventory, shipments, capacity planning, and equipment spending. The current environment is likely more stable and less cyclical for semiconductor and semiconductor capital equipment suppliers. In this maturing industry, the focus will be on market leadership/scale, operating margin and FCF margin expansion, and increasing payout ratios.

Following a correction in 2023 (down 8-10% YoT), fundamentals are stabilizing, and I expect demand to recover this year. I see semiconductor stocks having 15-25% upside, and our tops picks having 25%+ upside from current levels over the next 12-18 months as EPS estimates start to rise.

Government incentives for US domestic manufacturing capability are a positive – innovation and assurance of the supply base. Rep. Nancy Pelosi has even made a personal commitment in this space, making over $900,000 on her recent NVDA 0.00%↑ trade. She has made over four times her Congressional salary in 71 days on one trade. Her Nvidia call option is now up almost 45%+ since she entered two months ago.

Rep. Nancy Pelosi (D-CA) and her venture capitalist husband reportedly bet millions on technology giant Nvidia (NVDA) late last year — despite immense scrutiny and backlash against congressional stock trading.

The Biden administration, eager to highlight a signature economic initiative as elections approach, is expected to award billions of dollars in subsidies to Intel INTC 0.00%↑, Taiwan Semiconductor Manufacturing Co TSM 0.00%↑, and other top semiconductor companies in coming weeks to help build new factories.

The grants are part of the $53 billion Chips Act, intended to reshore production of advanced microchips and fend off China, which is fast developing its own chip industry.

Given continued volatility, we should focus on market leadership, strong US-based exposure to cloud/5G/AI infrastructure spending trends, strong product cycles, diversification, margin/free cash flow expansion with increasing payout ratios.

For my premium subscribers, below are the top picks this year: