INSIGHTS

Lingling Wu

Thu, Aug 20


The Semiconductor industry: is there still potential in this surging investment sector?

The semiconductor industry is one of the sectors Kylin Prime Capital portfolio management team has kept a very close eye over the last year, it has aided in the construction of the investment portfolios. This soaring sector has been an outperformer this year with semiconductors heralded  as the brains inside electronic devices. These chips are widely used in computing, telecommunications, gaming and healthcare, etc. The sectors research, development and delivery are often the key drivers behind technology innovation. Therefore the performance of semiconductor companies are positively correlated to techs.

Similar to other sectors, semiconductors have also experienced a remarkable comeback during the Covid-19 driven selloff in February and March. However, the industry has accelerated subsequently following, and at times driving up the markets following strong quarterly earnings data.

KPC valued this sector and as such added a semiconductor long position into its discretionary portfolio in the last quarter of 2019. The position brought strong returns for the investors gaining strong returns in the later stages of 2019 and first Quarter of 2020. Although the portfolio got stopped out during selloff in March (in profit from initial entry), the team rebalanced the portfolio, adding additional semiconductor companies again without hesitation, in expectation of an overdone collapse and ultimate recovery trend, which has transpired. Currently, KPC still holds some of the positions, which now lock in returns for the investors having trailing the stop losses meaning that even a down turn locks in profit, however should the market continue to expand, profits can be enhanced further.

 

Note: all the prices are standardized to capture only the fluctuation of the prices.

 

The highlighted  semiconductor companies below have  played a significant role in the stronger than client expected returns of the KPC portfolio.

AMD:  Year-to-date, AMD stock is up about 75%. Currently trading at $82

Advanced Micro Devices was founded in 1969, has grown into a global chip company with a focus on developing high-performance computing and visualization products. In 2017, AMD re-entered the data center market with its EPYC server processors. Google has built its Confidential Virtual Machines platform using AMD's second-generation EPYC processors instead of Intel's Xeon. AMD generated over 20% of its second-quarter revenue from data center products which are estimated to create approximately $1.5 billion revenue -- on track for a 50% improvement over 2019.

Analysts see AMD is taking a bigger bite out of Intel's pie as its next-generation Zen 3 server processors start shipping later this year. And Zen 4 server processors based on a 5-nanometer (nm) manufacturing process are also in the pipeline.

The largest public pension in the U.S. by assets--California Public Employees’ Retirement System (Calpers), made some big second-quarter changes in its investment portfolio by selling Apple stock in the quarter, and bought more shares of AMD.

AMD stock deserves to be on the long-term buy list as one of the go-to semiconductor stocks to buy.

NVDA: Year-to-date, NVDA stock is up around 105%. Currently trading at $483.

Nvidia’s revenue can be broken into four main segments: gaming, data center, professional visualization and automotive. Gaming which is a crucial segment, still accounts for over 40% of Nvidia’s total revenue.

For the second quarter 2020, Nvidia’s data-center sales reached $1.75 billion, compared with gaming sales of $1.65 billion. For the first time, the data center segment exceeds traditional gaming. Nvidia’s new data-center products like its A100 graphics-processing unit, that represent the first line of chips sporting a new GPU architecture that Nvidia dubs “Ampere.”, plays a big role in revenue contribution for the second quarter. This “Ampere” architecture is set to play a key role within AI-focused chips and in cloud computing.

Currently Nvidia is in advanced talk to acquire Cambridge -England based chip designer ARM Lts with Softbank. It also shows strong appetite and potential of Nvidia to grow in the data center segment.

On 17th August, Nvidia’s market cap rose above $300 billion for the first time, exceeding Intel and became the largest U.S. chip company by market capitalization.

Of the 40 analysts who cover Nvidia, 32 have buy or overweight ratings, six have hold ratings and two have sell or underweight ratings.

Qualcomm (QCOM): Year-to date, QCOM stock is up about 31%. Currently trading at $113.

Qualcomm is the largest maker of chips for smartphones and wireless modems. Its chipsets account for about two-thirds of its total revenue. Its patent-licensing division collects royalties from 3G and 4G technologies that the chip giant helped invent.

On July 29, Qualcomm announced it had beaten expected quarterly forecasts. It earned an adjusted 86 cents a share on revenue of $4.89 billion.

Wall Street believes that Qualcomm will play a dominant and early role in 5G, replicating its success with 3G and 4G mobile networks. Therefore, QCOM stock is a good pick for long-term investors.

Whilst the KPC portfolio management team believes there should be a continuous above expectation performance of the semiconductor industry in the latter part of the year, the team is also fully aware of the uncertainty in the coming month. In particular, the geographic tensions may damage the populism and distribution channels of this industry should tensions rise again. Therefore the team maintains its usual technical analysis as well ridgid trailing of stop losses to ensure the capture the held P+L of positive movements in the market, ensuring investors lock in their profit, but are not limited to the upside.

Note: all the prices are standardized to capture only the fluctuation of the prices.


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