by Bryan Perry

January 19, 2022

There is no denying that today’s investors are yearning to reduce their portfolio weight in tech stocks. Tech stocks have been on the ropes for the better part of a month, the most recent two weeks putting added downward pressure on the tech torchbearers and cloud kings. It’s not that there is a meaningful slowing of sales and earnings on the horizon, but just some textbook “multiple contraction at work.”

For high price-to-sales stocks that have shed up to 60% of their market value, the tide will likely continue to go out until interest rates plateau. Bargain hunting in this blown-up space seems premature, but for those that are very short-term oriented it might be good for an oversold trade during earnings season. Still, there has been a lot of pain and an absence of insider buying to trigger confidence that the worst is over.

There is some evidence of resilience in the tech sector with semiconductor equipment and semiconductor manufacturers. The Nasdaq Composite has corrected by 8.1% and the Nasdaq 100 (QQQ) is off 7.6%, but the VanEck Semiconductor ETF (SMH) has given back only -3.7% per last Friday’s close.

The chart below shows that SMH is maintaining its technical integrity with its 20-day moving average (blue) still holding above its 50-day (yellow) moving average to where they are at an inflection point.

VanEck Semiconductor Exchange Traded Fund Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Friday’s bullish reversal saw SMH open down sharply and then close at the highs of the day on solid volume. That seems to me like a buy signal for investors to lean into the sector with gusto.

The green light for this call stands on the release of fourth quarter earnings and future guidance by Taiwan Semiconductor (TSM) – the largest chip foundry in the world, released last Thursday. I normally try to avoid naming specific stocks here, but TSM’s set of numbers and guidance is remarkable.

For the fourth quarter, TSM earned $1.15 per share on $15.74 billion in revenue, up 24.1% year-over-year. Gross margin for the quarter was 52.7%, operating margin was 41.7%, and net profit margin was 37.9%. The company said that spending in 2022 would well exceed last year’s levels. For the quarter, shipments of 5-nanometer accounted for 23% of total wafer revenue; 7-nanometer accounted for 27%.

While discussing these results, TSM’s Chief Executive, C.C. Wei, said that the company would spend between $40 billion and $44 billion on capital expenditures to help ease the chip shortage facing the world now, and it was able to capitalize on demand. Wei said the added production capacity was due to higher demand for high-compute electronics, such as smartphones, electric vehicles and servers.

The biggest catalyst for the stock’s impressive move higher was the company’s upside guidance for the first quarter, seeing revenues of $16.6 billion to 17.2 billion vs. $15.78 billion S&P Capital IQ Consensus.

This is worth getting excited about from both a fundamental and technical standpoint, as TSM forecasts accelerating 2022 revenue and earnings growth in addition to breaking out of a one-year base formation.

Taiwan Semiconductor Manufacturing ADR Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This two-fold signal is a great tell for the sector. Taiwan Semiconductor is not only a true bellwether for what lies ahead this year for business conditions, but it is also the #1 holding for SMH, accounting for 14.1% of its total assets. Being a foundry that builds chips for customers with proprietary technologies, other chip and chip equipment stocks may outperform TSM when it comes to total price appreciation.

The key point is the magnitude of future demand being laid out by TSM and the bullish spillover to what it means to the rest of the leading chip and chip equipment companies that should report impressive Q4 results, while also raising guidance for the current quarter and the year ahead.

Intel Chief Executive Pat Gelsinger told CNET that he thinks we’re almost through the worst of the chip shortage, which he thinks will last through the second half of 2022. He predicts it will gradually ease through 2022 and fade in 2023. AMD CEO Lisa Su said in September at the Code conference, that “We’ve always gone through cycles. This time it’s different,” but she, too, expects this chip shortage to ease in 2022. IBM CEO Arvind Krishna thinks the chip shortage will last through 2023 and even 2024.

Navellier & Associates owns or Taiwan Semiconductor (TSM) and Intel Corp (INTC) in managed accounts but does not own Advanced Micro Devices (AMD), or International Business Machines (IBM) in managed accounts. Bryan Perry does not own Intel (INTC), Advanced Micro Devices (AMD), International Business Machines (IBM) or Taiwan Semiconductor (TSM) personally.

Worldwide Semiconductor Revenues Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

On January 3rd, the Semiconductor Industry Association (SIA) reported global semiconductor industry sales were $49.7 billion in the November 2021, an increase of 23.5% over the November 2020 total of $40.2 billion and 1.5% more than the October 2021 total of $49.0 billion. The cumulative annual total of semiconductors sold through November 2021 reached 1.05 trillion, the highest-ever annual total at a time when massive bottlenecks for components and raw materials were hampering the industry. One can only imagine the increased flow of finished goods once the supply chains begin to operate more normally.

Semiconductor Equipment versus Semiconductor Billings Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

With so much emphasis being placed on rotation out of all things tech and into cyclical sectors, a great deal of common sense is getting lost in the panic selling of software stocks with high price-to-sales or P/E ratios. While there is no escaping contraction in growth stocks when yields rise, most chip and chip equipment stocks trade with reasonable valuations and solid growth prospects targeting autos, industrial medical, power generation, automation and virtually everything with a power cord attached to it.

Income investors might want to consider owning SMH or a basket of some of its top holdings and selling out-of-the-money covered calls. In a volatile market such as the present, call option premiums expand, making for an excellent source of steady income. For a market trying to regain its footing after recoiling on fears of hawkish Fed policy changes, some things will remain constant for the next six months – one of them being a strong appetite for chip production and chip supply by the global economy.

That reality was made known last week by the world’s largest chip foundry, which validated that the bullish chip cycle has at least one more strong leg left to go. In this market – that totally works for me.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
So Far 2022 Looks Like 2018

Sector Spotlight by Jason Bodner
When the Fed Speaks, Everyone Listens – Way Too Much

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Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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