The Semiconductor Industry
Overvalued?
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The semiconductor industry has been in the financial news for a long time now. I am going to cover what the semiconductor industry is, why it has boomed, and where it may potentially be headed.
An acute reader would know I have invested in AMD in the paper portfolio, so I thought it was best to cover that before I go into anything else. 5% of my original allocated cash was placed into this stock. This is a small proportion of my portfolio, and I thought it was a great idea to get exposed to a bullish industry. Since, AMD has seen setbacks. There are still reasons to be bullish on AMD, for reasons I ahve written about previously. I am not as bullish on the stock as I was before; after doing the research for today’s article, I think the industry may experience some speedbumps in the future. Whilst I believe we will see a correction or more at some point in the short-mid term, which AMD may be a part of, I am holding for the long term with this stock.
Technology has been developing at a fast rate for the past 100 years (or so). There is constant development and invention of ways to make our lives easier and more interconnected. Not only this, but in more recent years, AI has been developing and revolutionising industries. The item needed to fuel these ever-increasing technological landscape are semiconductors. Whilst I will not go into the intricate technical details of semiconductors, they are crucial for a variety of applications, whether it be for personal computing, or wireless technology. Their application has also been growing massively in other areas, such as in cars and the development of automated driving. In a study by KPMG and the Global Semiconductor Alliance that surveyed 156 semiconductor executives (more than half the respondents were from companies with $1bn or more in revenue), 86% of them were optimistic about revenue growth over 2025. There have been new innovative funding opportunities too for semiconductor companies, in the UK alone, in a slightly outdated 2023 study, the UK government had given £1.7bn in funding and grants to semiconductor companies. A in 2022 McKinsey analysis suggests the industry could see an aggregate annual growth rate of 6-8% a year.
From that, you can see that the industry shows ample reason to invest in. However, there are multiple risks associated with semiconductor investing. Companies need steady revenue growth and must constantly be innovating. With an industry as fast-paced as technology, it can be easy to be left behind. Moreover, the industry is cyclical, with new advancements, companies all try to capitalise leading to oversaturation and prices falling. Moreover, there are supply chain vulnerabilities with countries promoting self-sufficiency. This is tough to do as the industry is cost-intensive demanding the necessity for high sales. Moreover, there is great competition which demands even lower costs. Another risk people believe may alter the industry is the growing volume of severe weather can damage supply chains. Furthermore, the KPMG and Global Semiconductor Alliance cited earlier, found that tariffs and armed conflicts concerned Executives, but companies have been working toward building more resilient supply chains.
An article in the Business Insider written in March 2024 mentions how the semiconductor rally had gone past previous peaks from Dot Com bubble era ‘Of even greater significance is the fact that the ratio between the semiconductor market gauge, as tracked by the iShares Semiconductor ETF (NYSE:SOXX) and the S&P 500 has now exceeded the levels observed in March 2000, the pinnacle of the dot-com bubble.’. This sort of activity is rare in markets and is a concerning statistic. It could be thought that the industry is overvalued too, and will likely see a correction at some point in the near-mid term. This is a very basic analysis, but to demonstrate my point, Nvidias P/E ratio at the time of writing is 53.56, and Broadcomm’s 188.46. Whilst this is not the same for all of the semiconductor companies, they may indicate excessive valuation despite future earnings potential.
In conclusion, while the semi-conductor industry remains crucial for global daily life, and is likely to see further increase in demand, it seems overpriced in the markets, and there are multiple risks associated with companies within the industry.
Sources:
Semiconductor Mania Surges Past Dot-Com Bubble's Peakmarkets.businessinsider.comhttps://markets.businessinsider.com › News › Stock News
https://www.sourcengine.com/blog/semiconductor-market-outlook-for-2025-predictions-and-trends-to-monitor?srsltid=AfmBOoqieNSjG7NBDepFa9Xge8puMyIQ5PjCzCklLf_rLi4BiHwX5cm2
https://www.onesafe.io/blog/semiconductor-future-growth-challenges-2025
https://kpmg.com/us/en/articles/2024/global-semiconductor-industry-outlook-2025.html
https://www.pwc.com/gx/en/industries/technology/state-of-the-semicon-industry.html
https://www.gov.uk/government/publications/semiconductor-sector-study/semiconductor-sector-study