The Internet of Things is creating more connections between devices.THOMAS COEX
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A year ago, the global shortage of microprocessors was so great it paralyzed supply chains and delayed the production of many products from smartphones and cars to medical equipment and factory robots.
The situation was so challenging that the chief executive officer of Netherlands-based ASML Holding NV ASML-Q, which makes the machines that make the chips, made a comment during a conference call that took listeners by surprise. Peter Wennink said a major industrial conglomerate he did not name was buying washing machines to pull out the chips and repurpose them.
Twelve months later, the shortages have eased and demand for microprocessors is weakening. One reason is companies that use microchips in their products are running down the supply of chips they accumulated last year during panic buying. And as high interest rates put a drag on the global economy, consumers are spending less. That, in turn, is reducing the need for chips among manufacturers as they trim their sales forecasts.
“We’re living in a world in which there’s too much inventory and declining demand,” says Matt Bryson, senior vice president, equity research, at Wedbush Securities Inc. in Boston. “I think 2023 is going to be a tough year.”
Even so, analysts say beyond the current weakness lies opportunity. One energizer is the expanding need for high-end microprocessors that are used in artificial intelligence applications. Another lies with the less sexy, plain-vanilla manufacturers. Their chips are found in everyday products from coffee makers and toaster ovens to chips that save photos on a computer or format the font on an eReader. The Internet of Things is creating more connections between devices all the time.
“The Internet of Things is a megatrend,” says Mark Noble, executive vice president of exchange-traded fund (ETF) strategy at Horizons ETFs Management (Canada) Inc. in Toronto. “We use semiconductors in everything. They are the hot sauce of technology.”
The out-of-the-limelight manufacturers include Texas Instruments Inc. TXN-Q, Analag Devices Inc., ADI-Q and NXP Semiconductors NV NXPI-Q. They have well-developed businesses, lower costs for research and development and longstanding relationships with customers. Their chips tend to make up a small portion of the cost of the product and are proven to work. As a result, end users are less inclined to swap them out and risk getting it wrong with a new supplier.
Proof of the profitability at the low end can be found in their dividend streams. Texas Instruments has increased its dividend in each of the past 17 years. Analog Devices has increased its dividend in each of the past 21 years.
While these lower-end chipmakers have appeal, Mr. Bryson says they suffer from the same macroeconomic pressures as higher-end manufacturers. In fact, they may suffer more in a downturn because a lot of their chips go into consumer products.
“I don’t think there’s safety in being more exposed to the low-tech market,” Mr. Bryson says. “Companies tend to be doing better in areas in which there’s demand growth.”
He’s neutral on the short-term prospects for industry leader Nvidia Corp. NVDA-Q, even though he believes it has plenty of long-term potential. Nvidia is best known for the graphic processing units (GPUs) used in video game systems and is also a leader in the chips used in AI and cloud-based computing. These chips run autonomous robots, self-driving cars and drones. A growing area is the processors used by cryptocurrency miners.
“Nvidia has the clearest path to selling into AI,” Mr. Bryson says. “You can see a clear trajectory.”
Nvidia’s shares have almost tripled this year, up 198 per cent at the recent price of US$427. Mr. Bryson also likes Taiwan Semiconductor Manufacturing Co. Ltd. TSM-N (TSMC), the world’s largest microchip manufacturer.
“[TSMC] is probably the best proxy for growth in integrated circuits,” he says. “It has the highest historic gross margins and a monopoly at the high end of the market.”
Mr. Noble notes that Nvidia’s price-to-earnings (PE) ratio of 221.8 reflects a high level of optimism and a lot of implied risk.
“You’re paying a massive premium for higher-end artificial intelligence stocks,” he says.
Texas Instruments on the other hand has seen its shares rise 8 per cent this year and has a forward PE ratio of 19.8. Analog Devices has seen its shares rise 16 percent and has a PE ratio of 26.6.
“These companies are trading at more attractive valuations and have strong secular levers of growth,” Mr. Noble says.
Horizons Global Semiconductor Index ETF CHPS-T holds a broad slice of higher and lower-end chipmakers. Despite Nvidia’s sky-high valuation, it’s the largest holding at 14 per cent of the ETF. Taiwan Semiconductor, Texas Instruments, Analog Devices and NXP Semiconductor combined account for another 19 per cent.
So, what should investors do?
“Diversification is your friend,” Mr. Noble says, arguing that a basket of stocks with exposure to different subsectors is the way to go because “you benefit dramatically from the trends regardless.”
He also sees a weak 2023, but “once inventory starts to decline and you get through the slowdown, things will ramp up and the sector starts to get very attractive.”
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
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