ETFs
Not all chip stocks are expensive
This article was originally published on ETFTrends.com.
Although briefly, NVIDIA (NVDA) was recently the most valuable publicly traded company. While Microsoft (MSFT) has since reclaimed that throne, Nvidia’s market capitalization exceeds the total market value of stock markets in France, Germany and the United Kingdom Over the past few years, Nvidia’s seemingly relentless rise has sparked fears about the stock’s frothy valuations. Although these concerns have not yet been validated, they persist. This is not to say that all chip stocks are overvalued.
For investors who want to mitigate some of the perceived valuation risk with Nvidia, ETFs such as VanEck Semiconductor ETF (SMH) could be wise options.
First, a disclaimer: SMH allocates a quarter of its portfolio to Nvidia. This is one of the largest weightings of the stock among all the ETFs that hold it. When it comes to Nvidia’s valuation risk, SMH may not be perfect, but it is home to several other semiconductor stocks that are much cheaper than Nvidia.
SMH has certain advantages in terms of valuation
One of the advantages offered by SMH is that the ETF is not limited to domestic semiconductor stocks. This is good news, as some ex-US stocks in the sector are much cheaper than domestic stocks. Taiwan Semiconductor (TSM)which is SMH’s second participation, is an example of this.
“Semiconductor manufacturing in Taiwanwhich is responsible for approximately 90% of the world’s ultra-advanced semiconductors, is one of the most well-known and widely held AI games outside of the United States. At 23 times next 12 months’ earnings, it trades at a ~33% discount to Nvidia,” reported Reshma Kapadia for Barron’s.
While the valuation isn’t necessarily cheap, another SMH member company that could power the ETF is Broadcom (AVGO). SMH’s third-largest holding had a market capitalization of $839 billion as of the close of U.S. markets on June 20.
In a recent report to clients, Bank of America predicts that California-based Broadcom will be the next U.S. company to boast a $1 trillion market capitalization, thanks in part to the chipmaker’s breakthroughs in artificial intelligence (AI). The bank considered Broadcom as one of the best choices in AI along with Nvidia. The two titles together represent more than a third of SMH’s weight. Again, Broadcom is by no means cheap, but its revenues are growing at an impressive rate.
“We model 18% revenue growth for Broadcom, including inorganic contribution from VMware, through fiscal 2028. We expect high AI sales to drive supernormal growth over the next five years, but that longer-term sustainable growth will take hold at the single high level. figures on an organic basis,” noted William Kerwin, analyst at Morningstar.
The story continues
For more news, information and analysis, visit Beyond the Basic Beta Channel.
POPULAR ARTICLES AND RESOURCES FROM ETFTRENDS.COM