The timing may be just right to buy Nvidia or other semiconductor stocks

By Philip van Doorn

A combination of a seasonal lull for chip makers, rising earnings estimates and a price decline could make for a good setup

So far this year, the PHLX Semiconductor Index has increased 8.7% (with dividends reinvested), but it has declined 7.7% in April. Meanwhile, shares of industry star Nvidia Inc. have declined 12% this month. Then again, Nvidia's stock has risen 61% so far in 2024, after more than tripling in 2023.

So what are investors to think of the recent action in the semiconductor space? In the Thursday Need to Know column, Jamie Chisholm shared ideas from equity strategists at Bank of America who had some encouraging words: Semiconductor stocks typically pull back in April and rally in May.

So even if you are a long-term investor rather than a short-term trader, you may be looking at an opportunity to play the semiconductor space broadly, or to select individual companies in the space. One easy way to invest in the industry is through the iShares Semiconductor ETF SOXX, which tracks the performance of the PHLX Semiconductor Index SOX by holding all 30 of its stocks. This approach is weighted by market capitalization, which means that Nvidia (NVDA) makes up 8.4% of the SOXX portfolio, according to data provided by FactSet.

Is the semiconductor group trading high, relative to expected earnings?

Now you might be wondering about the relative valuations of semiconductor stocks. The PHLX Semiconductor Index trades at a forward price-to-earnings ratio of 27.8, which is up from 24.3 at the end of last year, but down from a peak of 33.3 on March 7, according to FactSet. The forward P/E is based on current prices and rolling 12-month earnings-per-share estimates for the 30 component stocks, weighted by market capitalization.

In comparison, the forward P/E for the S&P 500 SPX is 20.2, which is up from 19.6 at the end of last year, but down from a 2024 high of 21.1 on March 28.

Here are current and average valuations for the two indexes:

   Index                        Forward P/E  3-year average P/E  5-year average P/E  10-year average P/E  15-year average P/E 
   PHLX Semiconductor Index            27.8                22.1                21.1                 17.9                 17.2 
   S&P 500                             20.2                19.1                19.5                 18.1                 16.4 
                                                                                                              Source: FactSet 

And here are current valuations relative to the averages:

   Index                       Current P/E to 3-year average  Current P/E to 5-year average  Current P/E to 10-year average  Current P/E to 15-year average 
   PHLX Semiconductor Index                             126%                           132%                            155%                            162% 
   S&P 500                                              105%                           104%                            112%                            123% 
                                                                                                                                            Source: FactSet 

Both indexes are trading above the longer-term averages, but this phenomenon is more extreme for the semiconductor group.

Here's a comparison of total returns for SOXX and for the SPDER S&P 500 ETF Trust:

   ETF                         Ticker   1-year return  3-year return  5-year return  10-year return  15-year return  20-year return 
   iShares Semiconductor ETF    SOXX              52%            48%           206%            776%          2,064%          1,124% 
   SPDR S&P 500 ETF Trust       SPY               24%            27%            88%            222%            674%            548% 
                                                                                                                    Source: FactSet 

Looking at the 15-year and 20-year returns, the semiconductor group was hit even harder during the 2008/early 2009 financial crisis than the broad market was.

Here are average annual returns:

   ETF                         Ticker   3 year avg. return  5 year avg. return  10 year avg. return  15 year avg. return  20 year avg. return 
   iShares Semiconductor ETF    SOXX                 14.1%               25.1%                24.2%                22.7%                13.3% 
   SPDR S&P 500 ETF Trust       SPY                   8.2%               13.4%                12.4%                14.6%                 9.8% 
                                                                                                                              Source: FactSet 

And here is a comparison of weighted five-year compound annual growth rates (CAGR) for revenue and EPS for the two indexes through 2023. The numbers are adjusted by FactSet for companies whose fiscal years don't match the calendar.

   Sector                      Five-year sales CAGR through 2023  Five-year EPS CAGR through 2023 
   PHLX Semiconductor Index                                 7.5%                             7.1% 
   S&P 500                                                  6.4%                             6.6% 
                                                                                  Source: FactSet 

Now let's look ahead at projected CAGR for the two indexes:

   Sector                      Two-year estimated sales CAGR through 2025  Two-year estimated EPS CAGR through 2025 
   PHLX Semiconductor Index                                          9.5%                                     20.3% 
   S&P 500                                                           5.7%                                     12.6% 
                                                                                                    Source: FactSet 

One might argue that you get what you pay for. The semiconductor group trades at a high P/E relative to the S&P 500, but it has grown sales and earnings more quickly than the broad index has over the past five years.

And the semiconductor group's outperformance by these measures is expected to accelerate.

Screening the SOXX 30

Let's begin by looking at forward P/E ratios for the entire SOXX 30 group of stocks and compare those to the ratios one year ago, while also showing one-year price changes, this time excluding dividends.

The list is ranked by how much the forward P/E has changed over the past year, ascending:

   Company                                           Ticker   Forward P/E  Forward P/E one year ago  One-year change in forward P/E  Forward P/E to 5-year average  1-year price change 
   Nvidia Corp.                                       NVDA           30.1                      55.2                            -46%                            76%                 195% 
   Intel Corp.                                        INTC           21.4                      31.4                            -32%                           129%                  16% 
   Axcelis Technologies Inc.                          ACLS           13.4                      18.9                            -29%                            75%                 -22% 
   Qorvo Inc.                                         QRVO           14.5                      20.3                            -29%                            96%                  22% 
   ON Semiconductor Corp.                              ON            14.7                      16.0                             -8%                            89%                 -12% 
   Rambus Inc.                                        RMBS           25.7                      26.2                             -2%                           132%                  16% 
   Teradyne Inc.                                      TER            28.6                      26.5                              8%                           124%                   3% 
   MKS Instruments Inc.                               MKSI           22.0                      19.6                             13%                           135%                  36% 
   United Microelectronics Corp. ADR                  UMC            11.8                      10.4                             14%                            84%                  -4% 
   STMicroelectronics NV ADR                          STM            12.8                      11.2                             14%                            78%                 -10% 
   Lattice Semiconductor Corp.                        LSCC           49.0                      41.4                             18%                           121%                 -21% 
   NXP Semiconductors NV                              NXPI           16.4                      13.0                             26%                           105%                  38% 
   KLA Corp.                                          KLAC           24.2                      19.2                             26%                           133%                  76% 
   Skyworks Solutions Inc.                            SWKS           13.3                      10.5                             27%                            96%                  -5% 
   ASML Holding NV ADR                                ASML           37.4                      28.6                             30%                           111%                  42% 
   Lam Research Corp.                                 LRCX           25.2                      19.1                             32%                           142%                  72% 
   Applied Materials Inc.                             AMAT           22.1                      16.5                             34%                           135%                  73% 
   Taiwan Semiconductor Manufacturing Co. Ltd. ADR    TSM            20.4                      15.1                             35%                           101%                  57% 

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04-27-24 0607ET

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