‘We have no doubts that Nvidia (NVDA:NASDAQ) is going to become the biggest company in the world in time.’ So says Stephen Yiu, manager of the Blue Whale Growth (BD6PG78) fund, which has consistently upped its stake in the AI chip champion since first investing in 2021.
Blue Whale doesn’t publicly disclose its stake sizes but data from Trustnet shows Nvidia to be the fund’s biggest single holding worth around 8.75% of assets. Wall Street has consistently raised the estimates ante and Nvidia has kept on beating, its most recent figures (22 May) showing quarterly revenues ballooning 262% versus the 241% expected, while net income and free cash flows around the $15 billion mark also rocketing year-on-year.
Plainly speaking, anyone who has invested in the Santa Clara-based AI (artificial intelligence) chips champion over the past 18-months has made a mint, with the stock surging from $112 to more than $1,000 since October 2022, the stock accounting for more than 5% of the Nasdaq Composite’s near-15% gains this year alone.
Yet analysts see positive investment returns incoming from across the semiconductors space through the rest of 2024 and beyond, and that’s why Shares believes more broad-based sector investment could pay off.
ANALYSTS WARMING TO THE THEME
For example, earlier this month Jefferies’ analysts initiated coverage on the US semiconductors sector with a long-term bullish outlook, indicating that the current upcycle in the space is expected to be strong and lengthy.
Analysts note that historically, the market is still early in the cycle, being just 14 months removed from the lowest year-on-year growth point, compared to over 30 months in the past nine cycles, implying 12 to 18 months of ‘growth ahead.’
‘We saw peak-peak Semi revenue growth of 20% to 40% over the last two cycles and our forecast includes 50% growth through 20’28 given the influx of $200 billion of AI spend, which suggests 30% to 60% upside remaining in the SOX based on historical cycle multiples,’ they wrote.
The SOX is the nickname for the PHLX Semiconductor Sector Index, the sector benchmark market capitalisation-weighted index composed of 30 semiconductor companies, which of course includes Nvidia.
The investment bank believes that AI investment is poised to grow significantly, potentially accounting for 25% of semiconductor revenues by 2027, up from approximately 5% in 2022. With rising cloud computing capital expenditure budgets, the growth trajectory for AI remains robust, aided by billions of dollars in grants being handed out by the US Government to keep the most advanced technology development within its sphere of influence.
Key Banc Capital Markets analyst John Vinh predicts auto companies such as Tesla (TSLA:NASDAQ) will be the largest source of demand this year, potentially driving several billion in revenues, but the analyst also anticipates sovereign AI deployment to start to inflect, contributing high-single-digit billion-dollar revenue this year.
Analysts at Citi are also ‘wildly bullish’ on semiconductor stocks, based on current demand trends. But while AI will continue to capture the headlines and the lion’s share of capital investment, other arguably less exciting areas are seen rebounding too, promising robust growth for nuts-and-bolts chip players too.
Memory chip manufacturer Micron Technology (NASDAQ:MU) is Citi’s top sector pick this year, who believe the DRAM (dynamic random access memory) upturn has begun, highlighting the recent commentary and guidance from the likes of South Korea’s SK Hynix (000660:KRX).
Analysts at the bank note stable demand in PCs, handsets, servers (which is 53% of the semiconductor total addressable market), and inventory replenishment. ‘We look for at least 11% year-on-year growth in global semiconductor sales in 2024,’ Citi has said, although they still see AI leading the way, and why Citi remains firmly supportive of further upside for Nvidia, plus peers like Advanced Micro Devices (AMD:NASDAQ) and Broadcom (AVGO:NASDAQ).
WHERE TO GET EXPOSURE
Now, many investors might feel they have plenty of semiconductor sector exposure already through S&P 500 or Nasdaq ETFs, for example. Shares estimates roughly 23% of the Nasdaq 100 is chip firms. That’s fair enough, but those that would like greater exposure have some very good options, including our preferred VanEck Semiconductor ETF (SMGB).
For a 0.35% ongoing charge, you get access to a concentrated portfolio of 25 of the industry’s most significant stocks, where most of the industry’s cyclical growth is expected to land. As well names already mentioned, it offers exposure to TSMC (TSM:NYSE), the world’s largest contract chip manufacturer and Nvidia’s most crucial partner, plus the likes of ASML (ASML:ASM) and Lam Research (LRCX:NASDAQ), which design and supply technology kit crucial to the chip manufacturing process.
It has chalked-up year-to-date gains of more than 30% compared to the Nasdaq’s 15% and S&P 500’s 12%, demonstrating the potential for semiconductor returns far beyond market averages.
DISCLAIMER: The author of this article (Steven Frazer) has a personal holding in Blue Whale Growth.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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