VanEck Semiconductor ETF (ticker: SMH) - Brief Breakdown
In my Brief Breakdowns,I pick a stock and present opposite sides – I present the bullish argument and the bearish argument.
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Company Description and Qualitative Analysis
The VanEck Semiconductor ETF is an actively managed ETF that looks to replicate the price and yield performance of the MVISe US Listed Semiconductor 25 Index, also known as the “Semiconductor Index”. In order to be included in the ETF, the companies must generate at least 50% of their revenues from semiconductors. The index contains 25 securities with a market cap range between $7.8 billion and $753.3 billion. The semiconductor industry is rapidly growing and with more chips being needed for everyday products, this allows investors to have broad exposure to the top 25 semiconductor companies by market cap.
Quantitative Analysis
At the time of this writing (4/10/2022), SMH is trading at $246.85 with a 52 week range of $222.82 - $318.82 and a market cap of $2.88B. The top 10 holdings of the ETF are the following companies with percentages: Taiwan Semiconductor Manufacturing Co (10.34%), Nvidia Corp (9.96%), Texas Instruments Inc. (5.22%), Broadcom Inc. (5.12%), Asmi Holding Nv (5.10%), Intel Corp (5.06%), Analog Devices Inc. (4.79%), Advanced Micro Devices Inc. (4.73%), Qualcomm Inc (4.49%), and Lam Research Corp (4.44%) This financial analysis was done using financialstockdata.com (sign up using our promo code GCI here). You can view SMH’s holdings here.
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Bullish Thesis
Here are three points to support the bullish thesis updates:
Chips in Everything: There is some sort of smart aspect in almost every product and this trend is increasing. Children’s toys, automobiles, phones, computers, the list goes on. Hell, they are even using devices to call pitches in the MLB now. If you look around you home or anywhere inside a business you’ll see multiple devices using various chips. Who knows maybe one day people will be pushing to have some sort of chip inside of them, but until that happens almost every device you have will contain some sort of semiconductor chip.
Increased Access to Tech: Society has gotten to a point where it is almost impossible to not have a smartphone, laptop, and access to the internet. Everyone needs some sort of tech device and some companies rely strictly on the access to tech. With the development of phone apps, it does not seem that tech is going anywhere anytime soon and this bodes well for semiconductors going forward.
Exposure to Massive Industry: This almost seems like a copout answer, but alias here we are. I am bullish on the semiconductor industry as a whole and if you are not confident in one specific company, this is an amazing way to get broad exposure. It is tough to look past the two points above for another bullish point as the first two just seem so obvious. The outlook for the semiconductor industry is extremely bullish and I believe that it will continue to be bullish going forward.
Bearish Thesis
Here are three points to support the bearish thesis:
Continual Supply Shortage: It seems that although COVID-19 pandemic is on the way out, the supply chain shortage has continually affected the semiconductor industry. With an industry that can be disrupted so heavily by shortages and stoppages in business. If this industry gets halted or affected by the war in the Ukraine or a potential conflict in Taiwan could drastically negatively affect the industry.
Potential Recession: During a recession, consumers look to cut costs and reduce spending. The most logical area to reduce spending is in additional technology for upgrades or that consumers will learn to live without. It seems that with the rapid inflation currently going on, it is not a matter of if but a matter of when a recession will occur. This will be a short term issue as I believe the tech industry is here to stay, but it may be something to be aware of.
Reliance on Tech Companies: Tech companies are generally known as growth companies due to their rapid growth and initial loss of capital in order to invest in their business and delay profitability. With a looming recession and the FED increasing rates, these growth companies may have decreased access to capital and will need to rely on revenue. If these companies cannot get money loaned to them it will be difficult for them to massively produce new products and if there is less demand there will need to be less supply. Either situation does not have a positive outlook for semiconductor companies as they rely on various companies in order to become profitable.
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Brandon
Disclosure: The article was written by Brandon Keys, and it expresses the author's own opinions. I am not receiving compensation for it. I have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon is not a financial advisor. I encourage all readers to do further research and do your own due diligence before making any investments.