Should you consider investing in semiconductors?

Posted on: 8th April 2021 in Investments

What are the best stocks to invest in right now? For investors, that’s the million-dollar question.

Crypto has certainly dominated the headlines recently. From NFTs to Bitcoin, investing in digital assets seems to be the current trend. Looking at the stock market and one company, in particular, has turned the pandemic into profits.

It will come as no surprise that Zoom tops the list of fastest-growing stocks for April 2021.

By the end of January 2021, Zoom’s net income grew more than 17 times year on year. However, we’re not here to talk about Zoom or Crypto. We’re here to talk about silicon – kind of anyway.

In this article, we look at why investing in semiconductors might be profitable for your portfolio.

Before we go any further, you need to know what a semiconductor is and why now might be the right time to invest in the sector.

What are semiconductors?

You can’t buy a semiconductor in a store. However, you probably don’t realise how much you rely on them day-to-day.

Are you reading this on your phone or your computer? Either way, both require a semiconductor to function.

Without getting too technical, semiconductors are typically found in computer chips. Their job is to allow electricity to flow through a device. For this reason, they are usually made from silicon because of the materials’ conductive properties.

You could think of computer chips as the brain of the device and semiconductors as the building blocks of that brain.

Cars, smartphones, washing machines, even LED bulbs rely on semiconductors to function. Even medical devices like MRI scanners and pacemakers need them.

You have probably heard of ‘Silicon Valley’ before. The tech hub gets its name from the silicon needed to make semiconductors. 

Now we know what they are, let’s look at the current problem.

Low supply, high demand

The demand for technology has soared since the pandemic began. 

If you have tried to buy a new CPU or a PlayStation 5, you will know that they are harder to come by than toilet roll during the first lockdown.

Sure, scalpers are one of the reasons why products are scarce and/or prices are overinflated. Remove scalpers from the equation, and the supply shortage for tech products remains. 

The reason why certain bits of tech are hard to come is simple. The demand is extremely high, and the supply can’t keep up.

So, why don’t manufacturers make more? The issue is, manufacturers want to; they just can’t.

Because of the shortage of semiconductors, production has ground to a halt. If you think this only affects the gaming and computer industry, think again.

Without the precious material, automakers are expected to lose billions as they struggle to maintain production. Experts suggest that the shortage could cost the automotive industry $60.6 billion in 2021.

Why is there a shortage?

There are several factors at play here.

An article by the Harvard Business Review points to geopolitical issues as being a part of the problem. 

Of course, the biggest reason for the shortage is Covid-19, and this is for two reasons.

The first is quite obvious. Lockdown measures had a significant impact on the supply chain, which leads us to the second point.

Although the supply was affected, the demand wasn’t. In fact, the pandemic saw demand soar.

The demand for computers, monitors and other devices went through the roof as people began working from home. Not only that, with people having to entertain themselves at home, it drove up sales of other products such as games consoles.

Ok, now we know what semiconductors are and why they are like gold dust in the current climate. So, with demand at an all-time high, should you consider investing in semiconductors?

Let’s look at some data to answer that.

Data and unicorns

2020 was a tough year for the financial markets. Still, those who were investing in semiconductors would have seen greater returns than those invested in some of the more well-known markets.

Data from MarketWatch tracked the PHLX Semiconductor Sector performance (SOX) against the S&P 500 in 2020.

For reference, SOX is an index of the semiconductor sectors’ 30 largest companies.  

By March of 2020, stock markets worldwide started to take a hit due to the pandemic and subsequent lockdowns. SOX was down as low as 12% in March, while the S&P 500 dropped by 20%.

Although it was the same story for both in March, each index’s recovery was very different.

Here is how SOX performed against the S&P 500 and the FTSE 100 in 2020.

By December 2020, the S&P 500 was up by nearly 30%, while the SOX index was up by just over 89%.

Looking at individual stocks and big-name companies in the sector such as Nvidia have performed well. 

The company is one of the larger manufacturers of semiconductors. Their recent financial results will certainly put a smile on the faces of their investors.

The American tech company made $16.68 billion in 2020, increasing 50% year on year. 

However, when considering the best stocks to invest in right now, you may want to consider unicorns – stay with us here.

When we talk about unicorns, we are not talking about mythical creatures. The term ‘unicorn’ simply describes a privately held start-up valued at more than £1 billion – or $1 billion, depending on which side of the Atlantic you are on.

Graphcore, a UK-based semiconductor company, are one of the firms credited with driving the UK tech sector and propelling it to new heights.

The Bristol-based firm is looking to take on dominant players in the sector, such as Nvidia and Intel. The firm raised $222 million through investments in 2020. The latest round of investments saw the company valued at $2.77 billion, up from $1.5 billion in 2018. 

Conducting your next move

Investing can be a tricky thing at the best of times. The current climate has made things even more complicated.

Back to our original question. Should you consider investing in semiconductors? Well, for the performance of SOX and individual semiconductor stocks in 2021, things could be promising.

First of all, there is a backlog that needs clearing. On top of that, chipmakers such as Intel and AMD will no doubt be looking to launch a new line towards the end of the year. These and other factors will all contribute to the demand for semiconductors.

The pandemic has taught investors to adapt and rethink their strategy. Certain stocks such as Zoom have increased in value, and savvy investors have taken note.

Is investing in semiconductors the right move? Maybe, but there are no sure things when it comes to investing. However, with the proper insight and advice, you will be able to make smart investment decisions. 

Good knowledge of the financial markets and investment strategies are two key ingredients for building a profitable portfolio. At Holborn, our investment experts have the knowledge and experience needed to help you reach your financial goals.

To find out how we can help you to invest effectively, speak to one of our specialists. Contact us using the form below, and someone will be in touch.