IT has been a rocky year for the global economy, as well as the semiconductor industry. In March, the PHLX Semiconductor Sector Index, comprising 30 leading semiconductor companies, sank to a year-to-date low of 167.79, more than 30 per cent lower from the beginning of the year. Even though share prices have since recovered, we believe there is still further upside available.
A key contributing factor to the poorer performance of chipmakers earlier this year was the supply chain disruptions and dampened consumer confidence brought about by the pandemic.
Figures released by the Semiconductor Industry Association showed that semiconductor sales rose by 4.1 and 5.5 per cent year on year in Q1 2020 and Q2 2020, respectively, lower than our previous forecast of double-digit sales growth.
However, despite falling short of our expectations, investors should note that sales growth is still within positive territory, a sign that chipmakers are holding up well at a time when many companies are struggling, with some even forced to declare bankruptcy.
Apart from the pandemic, another issue weighing on the share prices of chipmakers is the deepening dispute between the US and China. In recent months, the Trump administration has tightened restrictions on Huawei and SMIC, limiting the amount of semiconductors, as well as semiconductor manufacturing equipment that can be exported to them.
With China being the biggest purchaser of semiconductors worldwide, fears that these restrictions will soon extend to other Chinese technology companies has placed downward pressure on the share prices of US chipmakers and equipment manufacturers.
Even with the negative impact from Covid-19 and worsening US-China tensions, we remain positive on the outlook for the global semiconductor industry. Looking ahead, we observe several signs that the industry is well-positioned to emerge from the crisis stronger than before.
5G a significant growth driver
In mid-October, Taiwan Semiconductor Manufacturing Company (TSMC), the world's largest contract chipmaker and industry bellwether, sold a record US$12.14 billion worth of chips in the third quarter of 2020, almost 30 per cent higher compared to the same period a year ago.
The surge in sales is driven by heavy demand for the company's advanced technologies (defined as 16nm process and below) for applications, such as 5G and high performance computing.
Q3 2020 is also the first time TSMC recorded revenue from its industry leading 5nm process, which contributed 8 per cent of its total revenue for the quarter.
Industry sources indicate that approximately two-thirds of TSMC's 5nm capacity is currently being used to produce Apple's A14 processors that can be found in Apple's newest line-up of smartphones, which are the first to feature 5G.
As more smartphone makers begin to launch their own line of 5G smartphones, TSMC expects demand for 5G chips to rise rapidly over the coming few quarters.
To meet this demand, the company intends to increase its 2020 capital spending to US$17 billion, up from the previously forecasted US$15 billion.
In addition, the company is also raising its full-year revenue guidance for the second time this year to 30 per cent above 2019, from the previously forecasted 20 per cent, to reflect the positive impact of the quicker-than-expected adoption of 5G technology.
Cloud computing
Besides 5G, the shift to cloud computing is another megatrend expected to contribute positively to semiconductor demand.
Over the past few months, we note that the Covid-19 pandemic has been an unexpected catalyst for cloud computing.
As much of the world went into lockdown and social distancing measures were put in place, businesses all over the globe scrambled to invest in cloud computing infrastructure to enable employees to work remotely. This resulted in heightened demand for data centre chips.
NVIDIA, a company best known for its graphics cards, reported that revenue for its data centre segment surpassed gaming for the first time, as cloud service providers expanded their capacity during the pandemic.
As both individuals and businesses become more aware of the numerous benefits of cloud computing, we expect the trend of cloud adoption to persist into the future, but at a quicker pace, thanks to Covid-19.
Long-term growth story intact
Given the growing importance of chips and the structural tailwinds behind the industry, we continue to hold a positive view on the semiconductor industry in the long run.
Demand for semiconductors will only increase as the world we live in becomes increasingly digitalised. As demonstrated by recent events, semiconductors are an important commodity in the global economy today, and will likely become even more so as we head into the future.
The Covid-19 disruption is a temporary setback, with a negligible negative impact on the industry's long-term growth story.
Taking a more optimistic view, one can argue that Covid-19 may even have a net-positive impact on the semiconductor industry as businesses speed up their investments in technology. This should in turn lead to higher earnings and better share price performance for semiconductor companies.
Investors who are looking to gain exposure to the semiconductor industry may consider using ETFs such as the VanEck Vectors Semiconductor ETF (NASDAQ:SMH) or the iShares PHLX Semiconductor ETF (NASDAQ:SOXX).
- The writer is the senior equity analyst of the stocks and ETFs research team at FSMOne.com. FSMOne.com is the Business-to-Consumer (B2C) division of iFAST Financial Pte Ltd., the Singapore subsidiary of SGX Mainboard-listed iFAST Corporation Ltd.
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