Artificial Intelligence related stocks led the way robustly in the first half of 2023 with Nvidia (NVDA) leading the way. The general consensus among major strategists cautions that the steep price increases of such stocks is characteristic of a market bubble. Furthermore, for those who must be invested in equity, they suggest using growth stocks and cap-weighted index investments as sources of funds and then rotating to value mutual funds, value ETFs and stocks. Rather than accept these broad-brush macro assertions, we look at the ValuEngine industry report, specific stocks and ETFs to find analytic guidance.
We look at the data for six semiconductor stocks and four ETFs in this issue.
All 5,000 stocks, 16 sector groups, 140 industries, and 500 ETFs have been updated.
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Semi-conductor stock Analysis:
- Nvidia Corp. (NVDA) provides graphics, and computer and networking solutions in the United States, Taiwan, China, and internationally. The company’s Graphics segment offers GeForce GPUs for gaming and PCs, the GeForce NOW game streaming service and related infrastructure, and solutions for gaming platforms; Quadro/NVIDIA RTX GPUs for enterprise workstation graphics; vGPU software for cloud-based visual and virtual computing; automotive platforms for infotainment systems; and Omniverse software for building 3D designs and virtual worlds. Its Compute & Networking segment provides Data Center platforms and systems for AI, HPC, and accelerated computing. NVIDIA Corporation was incorporated in 1993 and is headquartered in Santa Clara, California.
- Intel Inc. (INTC) designs, develops, manufactures, markets, and sells computing and related products worldwide. It operates through Client Computing Group, Data Center and AI, Network and Edge, Mobileye, Accelerated Computing Systems and Graphics, Intel Foundry Services, and Other segments. The company offers platform products such as central processing units, chipsets, and system-on-chip and multi chip packages, accelerators, boards and systems, connectivity products, and memory and storage products. It also provides high-performance computing solutions for targeted verticals and embedded applications for retail, industrial, and healthcare markets; and solutions for assisted and autonomous driving comprising computer platforms, computer vision and machine learning-based sensing, mapping and localization, driving policy, and active sensors. The company was incorporated in 1968 and is headquartered in Santa Clara, California.
- Texas Instruments, Inc. (TXN) Texas Instruments Incorporated designs, manufactures, and sells semiconductors to electronics designers and manufacturers in the United States and internationally. It operates in two segments, Analog and Embedded Processing. The Analog segment offers power products to manage power requirements across various voltage levels, including battery-management solutions, DC/DC switching regulators, AC/DC and isolated controllers and converters, power switches, linear regulators, voltage references, and lighting products.The Embedded Processing segment offers microcontrollers that are used in electronic equipment; digital signal processors for mathematical computations, and applications processors for specific computing activity. The company also provides DLP products primarily for use in project high-definition images, calculators, and application-specific integrated circuits. It markets and sells its semiconductor products through direct sales and distributors, as well as through its website. Texas Instruments Incorporated was founded in 1930 and is headquartered in Dallas, Texas.
- STMicroelectronics N.V. (STM) designs, develops, manufactures, and sells semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. The company operates through the Automotive and Discrete Group; Analog, MEMS and Sensors Group; and Microcontrollers and Digital ICs Group segments. The Automotive and Discrete Group segment offers automotive integrated circuits (ICs), and discrete and power transistor products. The Analog, MEMS and Sensors Group segment provides industrial application-specific integrated circuits (ASICs) and application-specific standard products (ASSPs); general purpose analog products; custom analog ICs; wireless charging solutions; galvanic isolated gate drivers; low and high voltage amplifiers, comparators, and current-sense amplifiers; MasterGaN, a solution that integrates a silicon driver and GaN power transistors in a single package; wireline and wireless connectivity ICs; touch screen controllers; micro-electro-mechanical systems (MEMS) products, including sensors or actuators; and optical sensing solutions.
- Rambus Inc. (RMBS) provides semiconductor products in the United States, Taiwan, South Korea, Japan, Europe, Canada, Singapore, China, and internationally. The company offers DDR memory interface chips, including DDR5 and DDR4 memory interface chips to module manufacturers, and OEMs; silicon IP comprising, interface and security IP solutions that move and protect data in advanced data center, government, and automotive applications; and physical interface and digital controller IP to offer industry-leading, integrated memory, and interconnect subsystems. It also provides a portfolio of security IP solutions, including crypto cores, hardware roots of trust, high-speed protocol engines, and chip provisioning technologies; and a portfolio of patents that covers memory architecture, high-speed serial links, and security products. The company markets its products and services through its direct sales force and distributors. Rambus Inc. was incorporated in 1990 and is headquartered in San Jose, California.
- Indie Semiconductor, Inc. (INDI) provides automotive semiconductors and software solutions for advanced driver assistance systems, autonomous vehicle, in-cabin, connected car, and electrification applications in the United States, South America, rest of North America, Greater China, rest of Asia Pacific, and Europe. It offers ultrasonic sensors for parking assist and systems; radar sensors for audio assistance and reverse information; front cameras for vehicle detection, collision avoidance, and sign reading; and side/inside cameras for blind spot and lane change assist, and driver behavior monitoring. The company also provides LiDAR for distance, speed, and obstacle detection, collision avoidance, and emergency brake system; and long range RADAR for audio assistance, obstacle detection, and ACC stop and go. In addition, it designs and manufactures photonic components on various technology platforms, including fiber Bragg gratings, low-noise lasers, athermal and tunable packaging, photonic integration, and low-noise and high-speed electronics. The company was founded in 2007 and is headquartered in Aliso Viejo, California.
The following table presents a look at the data behind these stocks, including the ValuEngine Buy/Hold/Sell rating. The ValuEngine Rating is an overall assessment of a stock’s relative attractiveness. It combines the following five factors: valuation (using ValuEngine’s proprietary valuation model), risk-return tradeoff, momentum, market capitalization, and forecasted future returns. Only two percent of the stock universe receives the highest 5-engine rating (Strong Buy), while the lowest rating is a single engine (Strong Sell).
Invesco QQQ (QQQ) which owns the Nasdaq-100, popularly used as a barometer for US technology stocks is used for comparison and benchmarking purposes in the table below. As shown, QQQ is rated 3 (Hold).
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
| INDI | NVDA | INTC | TXN | STM | RMBS | QQQ | ||
| Stock Name | INDIE SEMI-
CONDUCTOR |
NVIDIA CORP | INTEL CORP | TEXAS INSTRS | STMICRO
ELECTRON |
RAMBUS
INC |
INVESCO Nasdaq 100 | |
| Market Cap, (Bllns.) | 1.4 | 1123.1 | 138.3 | 164.2 | 47.7 | 6.73 | 204.32 | |
| ValuEngine Rating | 5 | 4 | 3 | 3 | 3 | 3 | 3 | |
| VE Forecast 3-mo. Price Return | 4.54% | 4.75% | 2.86% | 1.13% | 1.13% | 7.49% | 3.08% | |
| VE Forecast 1-yr. Price Return | 11.98% | 8.37% | 4.12% | -3.64% | -4.34% | -0.34% | 0.55% | |
| Last mo. Price Return | 4.64% | 5.73% | -6.83% | 2.11% | 4.50% | -0.88% | 3.60% | |
| Last 3 mo. Price Return | 4.64% | 69.93% | 3.95% | 1.04% | 3.35% | 23.49% | 18.99% | |
| Last 6 mo. Price Return | 25.28% | 169.06% | 10.10% | 1.03% | 27.56% | 57.22% | 34.91% | |
| Historic 1-Yr. Price Return | 27.76% | 195.79% | -12.09% | 14.57% | 63.80% | 188.07% | 32.23% | |
| Historic 5-Yr Ann. Price Return | -1.25% | 39.32% | -7.93% | 9.81% | 16.31% | 32.65% | 15.33% | |
| Volatility | 54.24% | 53.02% | 31.63% | 24.92% | 41.27% | 41.57% | 22.41% | |
| Sharpe Ratio | -0.02 | 0.74 | -0.25 | 0.39 | 0.40 | 0.79 | 0.68 | |
| Beta | 0.89 | 1.79 | 0.89 | 1.00 | 1.57 | 1.29 | 1.10 | |
| Undervaluation Percentile | 42 | 60 | 28 | 30 | 27 | 6 | 24 | |
| P/B Ratio | 4.0 | 60.6 | 2.1 | 15.1 | 3.6 | 15.9 | 7.2 | |
| P/E Ratio | 82.0 | 147.5 | 114.3 | 22.1 | 11.2 | 42.3 | 30.6 | |
| P/S Ratio | 11.2 | 43.4 | 2.5 | 8.4 | 2.8 | 14.3 | 4.0 | |
| PEG Ratio | 0.2 | 0.9 | 1.0 | Neg. | Neg. | 3.9 | 2.3 | |
| EPS Growth | 126.50% | 156.0% | 113.8% | -6.7% | -15.8% | 11.0% | 21,3% | |
| Div. Yield | 0.00% | 0.04% | 1.51% | 2.74% | 0.46% | 0.00% | 0.57% |
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
Observations
- According to ValuEngine’s predictive model, the answer to the title question where NVDA is concerned is yes. NVDA is rated as a 4 (Buy) according to the ValuEngine model. Over the next 6-months, our model expects NVDA to outperform QQQ substantially, 8% as compared with less than 1%. Counterintuitively, NVDA is also endorsed by our current valuation model with a 60% undervalued rank, meaning that it is more undervalued than 60% of the companies in our universe. Its extraordinarily strong EPS growth and its very low Price-to-Earnings-Growth (PEG) Ratio are two indicative factors here. By most conventional ratios, NVDA would appear overvalued, but our model believes those ratios will continue to rise before they eventually decline. Interestingly, NVDA pays a dividend albeit meager. It is worth mentioning because historically, paying a dividend at all is considered a sign of stability as it represents an implicit commitment to raising that dividend in the future.
- One much smaller semiconductor stock, Indie Semiconductor (INDI), has an even higher ValuEngine rating of 5 (Strong Buy) for one-year price growth. Its price growth in the past 12 months has been just 28%, a bit less than the 32% posted by QQQ and much less than NVDA’s 196% number. This may imply that INDI still has more room to run given its lower base price. This is reflected by the fact that by traditional valuation ratios, INDI, while still expensive, is less overpriced than NVDA. However, the ValuEngine valuation model considers INDI somewhat overvalued.
- Although they’ve recently publicized enhanced technology to address the flexibility and capacity needs of AI providers, Intel (INTC), a pioneer in semiconductor development, has not been as much of a beneficiary of the AI-inspired tech boom as its competitors. Its 12% one-year price gain badly lags QQQ’s 32% and is the lowest of the 6 semiconductor stocks included in this table. This may be a “hangover” from recent years of disappointment as that number still represents a nice improvement over its five-year negative return. Moreover, its PEG ratio is low as its earnings stream appears to be getting back on track. Its P/E and price-to-sales ratios are also the least expensive in the study. Finally, the forecasted year-ahead return of more than 4% is higher than that of QQQ and the other 3-rated stocks in the table.
- Rambus (RMBS) has been very involved in the AI boom. Until recently, its price and sales growth had paralleled that of NVDA although it has been on a much smaller scale. The price did stumble a bit in the past four weeks. Its projections for earnings growth are now more muted than those for NVDA. Although rated 3 (hold), its projected 12-month gain is lower than the other stocks in this analysis. Moreover, our valuation model rates it in the top decile of overvalued stocks in the entire ValuEngine universe.
- Texas Instruments (TXN), the oldest and most established company whose stock appears in this analysis, provides the highest dividend yield by far at 2.7%. That number is nearly twice the yield of the S&P 500 Index and 3.5 times that of QQQ. That, along with low price volatility, are the best two things going for the stock. Its sales have not risen appreciatively with the AI boom and its earnings stream has been negative recently.
- Finally, STMicroelectronics (STM) is in the middle in the attractiveness spectrum. It has participated more in the AI boom than INTC and TXN but less than NVDA, RMBS and INTI. Its traditional price ratios are among the two lowest in all categories and it pays a dividend yield of 0.5%, competitive with that of QQQ. However, it has negative earnings growth so there are probably better choices right now in the industry.
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As usual, let’s take a look at the analysis table for the ETFs that hold many of these stocks. Four ETFs have been selected for this analysis. Descriptions have been taken from a combination of ETF.com and ETFdb.com.
Semi-conductor ETF Analysis:
- iShares Semiconductor ETF (SOXX) – SOXX tracks a popular benchmark of companies that produce semiconductors, a crucial part of modern computing. SOXX is passively managed to provide concentrated exposure to the 30 largest US-listed semiconductor companies. This includes (i) manufacturers of materials with semiconductors that are used in electronic applications or in LED and OLED technology and (ii) providers of services or equipment associated with semiconductors. The index employs market-cap-weighting with a capping methodology—the weights of the top five securities are capped at 8% and the remaining securities at 4%. SOXX may also hold ADRs, whose cumulative weight in the index is capped at 10%. The fund uses a sampling strategy to track its index, which is reconstituted annually and rebalanced on a quarterly basis. Prior to June 21, 2021, the fund was named iShares PHLX Semiconductor ETF and tracked the PHLX Semiconductor Sector Index.
- SPDR Semiconductor ETF (XSD) – XSD tracks a popular benchmark of companies that produce semiconductors. XSD has a high percentage of pure-play semiconductor companies in its segment. The fund captures semiconductor companies, as defined by GICS, from the S&P Total Market Index which provides exposure to US companies of any capitalization. In the highly concentrated semiconductors segment, the fund’s equal-weighting scheme tilts its portfolio away from large, well-known companies and toward smaller growth ones.
- Invesco Dynamic Semiconductors ETF (PSI) – PSI is a passively-managed fund that attempts to beat the industry by selecting and weighting 30 semiconductor companies using a proprietary, quantitative methodology that focuses on risk factors, style classification and stock valuation. Specifically, stocks are evaluated based on five factors: price momentum, earnings momentum, quality, management action, and value. In a heavily concentrated industry, PSI tilts firmly toward smaller growth companies because of its tier-weighting scheme. Thus, it reduces concentrations in mega-caps and evenly weights the group of companies across size.
- First Trust Nasdaq Semiconductor ETF (FTXL) – FTXL is a semiconductor ETF that puts an unusually strong and explicit emphasis on liquidity. The 30 most liquid semiconductor stocks in the US are chosen for inclusion in the index as determined by the average daily traded volume over three months. The securities are then ranked and weighed according to value, volatility, and growth factors. Value is measured using a cash flow to price metric. The trailing one- year volatility provides another factor. Growth is considered using the average of the 3, 6, 9, and 12-month price return. The five highest ranking securities will be capped at 8% and the remaining securities will be capped at 4%.
Invesco QQQ ETF (QQQ) owns the stocks of companies comprising the Nasdaq-100 index, popularly used as a barometer for US technology stocks, It is used for comparison and benchmarking purposes in the table below. As shown, QQQ is rated 3 (Hold)
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
| SOXX | XSD | PSI | FTXL | QQQ | |
| ETF Name | iShares Semi-Conductor ETF | SPDR Semi-Conductor ETF | Invesco Dynamic Semi-Conductors
ETF |
First Trust Nasdaq Semi-Conductor ETF | INVESCO Nasdaq 100 ETF |
| ValuEngine Rating | 4 | 3 | 3 | 3 | 3 |
| Forecast 3-mo. Price Return | 2.36% | 1.85% | 1.94% | 2.05% | 3.08% |
| Forecast 1-yr. Price Return | 1.61% | -1.35% | -2.12% | -1.81% | 0.55% |
| Historic 1 mo. Price Return | 0.32% | 1.93% | 3.00% | 0.62% | 3.60% |
| Historic 3 mo. Price Return | 22.46% | 15.92% | 18.80% | 16.44% | 18.99% |
| Historic 6 mo. Price Return | 34.16% | 21.64% | 24.89% | 23.06% | 34.91% |
| Historic 12-month Price Return | 43.63% | 44.08% | 39.23% | 31.98% | 32.23% |
| Historic 3-Yr. Ann. Price Return | 22.38% | 23.96% | 21.97% | 16.51% | 13.20% |
| Historic 5-Yr Ann. Price Return | 20.92% | 22.39% | 19.27 | 16.14% | 15.33% |
| 2022 | -35.09% | -30.92% | -34.68% | -33.88% | -33.07% |
| 2021 | 44.09% | 42.54% | 46.39% | 36.04% | 26.81% |
| 2020 | 52.73% | 61.94% | 56.41 | 46.06% | 47.57% |
| Number of Holdings | 31 | 39 | 32 | 32 | 1009 |
| Largest Holding | Nvidia (NVDA) 8.7% | Semtech (SMTC) 3.4% | Nvidia (NVDA) 6.2% | Broadcom (AVGO) 10.0% | Microsoft (MSFT) 12.8% |
| Avg. Market Cap.($B) | 225.6 | 87.9 | 137.7 | 146.5 | 1040.5 |
| Price/Book Ratio | 4.9 | 3.8 | 3.8 | 3.5 | 7.2 |
| Price/Earnings Ratio | 27.6 | 38.7 | 20.2 | 21.8 | 33.4 |
| Dividend Yield | 0.9% | 0.4% | 0.5% | 0.7% | 0.6% |
| Assets ($B AUM) | 8.6 | 1.6 | 0.7 | 1.2 | 209.0 |
| Expense Ratio | 0.35% | 0.35% | 0.56% | 0.60% | 0.20% |
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
Observations
- According to ValuEngine’s predictive model, the only attractive semiconductor ETF to make this study is SOXX with a rating of 4. It also has by far the largest average market cap and the highest total of assets under management. It is tied for the lowest expense ratio and the highest dividend yield of the semiconductor ETFs.
- Although all four semiconductor ETFs use different methodologies, the historical returns are very similar and highly correlated. There is not a great deal of dispersion in the valuation characteristics either. To the extent that there is disparity, the P/E of the equal-weighted SPDR ETF (XSD) is much more overvalued at 38.7 than the modified-cap-weighted SOXX. Therefore, if the VE model is correct and NVDA has some time to run, then SOXX appears to deserve strong consideration as the ETF of choice.
- Most of the highest weighted holdings in all four semiconductor ETFs are also held in QQQ and are also in the S&P 500 Index. Many advisors are concerned that the S&P 500 ETFs are too concentrated and risky to be the core holding for their clients, particularly retirees that need an income stream. Even more believe the same to be even more true for QQQ which is more volatile, more concentrated and has a lower dividend yield. These ETFs are even less diversified and more volatile than either. Therefore, while SOXX and NVDA are both attractive now and have a strong outlook for the year-ahead according to ValuEngine models, they may not be good choices for investors with low risk tolerances.
_______________________________________________________________
By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
www.ValuEngine.com
support@ValuEngine.com
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