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Subsidies and double-digit growth for semiconductors

By Mathieu VILLARD
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Is this the right time to invest in semiconductors?

An industry in the spotlight

Few industries can boast garnering as much attention as semiconductors, which says just how important they have become in the economy. Governments in both Europe and the United States have outlined massive subsidy plans. More than EUR 43 billion for Europe and USD 52 billion dollars under the US CHIPS and Science Act. These exceptional measures are expected to benefit a significant number of companies, especially manufacturers of machines used to produce chips such as KLA, ASML, Applied Materials and Tokyo Electron.

A fast-growing industry

World Semiconductor Trade Statistics (WSTS) has published its new forecast for the semiconductor market. Following its impressive growth of 26.2% in 2021, WSTS projects the market will expand by a further 13% in 2022 to USD 633 billion. The long-term outlook is also attractive. A McKinsey study suggests that the industry could grow by an average of 6% to 8% per year until 2030.

More affordable valuations

Current company valuations across the sector are drawing appeal due to the pressure affecting equity markets. For example, the price/earnings ratio (P/E) of a representative basket of semiconductor stocks stands at around 16 (Bloomberg, 1 September 2022), i.e. less than half of its five-year high of 35 hit in the first quarter of 2021. Plus, the return potential is enticing, with analysts forecasting a one-year rise of around 37% sector-wide (Bloomberg, 1 September 2022).

A good long-term investment?

Semiconductor stocks could prove to be a good long-term investment option given the growing demand fuelled by the never-ending onward march of technological progress. These days, all companies are going electronic. Watches. Bicycles. Refrigerators. Every object is now connected. The most striking example is the automotive industry. In less than 20 years, the price of semiconductors as a share of the total price of a vehicle has risen from an average of 18% to 40%.

This exponential demand will be good for industry companies in the long run. As a result, semiconductor stocks are expected to follow an upward path in the years to come, although they are likely to experience rough patches in the short term. Geopolitical tensions and global economic growth remain major influencing factors.