The AI Revolution takes hold
What’s been dominating financial market headlines as of late is the massive rally in share prices by semiconductor companies, led by NVIDIA Corporation (NASDAQ: NVDA)—which was up more than 25% in after-hours trading on May 24, 2023 – nearing the coveted trillion-dollar market cap mark.
This came on the heels of NVIDIA’s jaw-dropping guidance revision, which pointed towards $11 billion of revenue in the second quarter alone (vs. $7 billion from prior market (or analyst) consensus).
NVDA’s Second-quarter Revenue Expectations vs. Prior Street Consensus
What supported this guidance uplift is the expectation for generative AI to unlock an enormous expansion of demand for computing requirements.
Many people have heard of ChatGPT by now, a chatbot that can generate responses in the form of human conversation. ChatGPT is an example of generative AI, however, there could be a mind-boggling amount of other use cases for generative AI across media, technology, industrial, and many other sectors.
The bulk of the demand surge is coming from data center infrastructure products, which will transition from “general purpose” to “accelerated computing” as companies across the spectrum of the economy look to apply generative AI to every product, service, and/or business process.
Data, data, and more data
The revolution can be boiled down to one word: data. Massive amounts of data are required to be processed through data centers, which house vast computing resources and storage, enabling AI by completing complex calculations and supporting AI applications.
The bottom line is that the winners of the AI revolution will be the companies that can meet the demand for high-processing-powered data centers.
Broadly speaking, semiconductor manufacturing companies should benefit from this ongoing trend. Not only will a greater demand for semiconductors be needed to meet the increasing computing, memory, and networking requirements of the AI revolution—but the underlying generative AI technology can help the chip companies run more efficiently, develop new products, enter new markets, and ultimately spark greater innovation.
How to pick the winning horse?
Globally, chipmakers are set to benefit by varying degrees depending on their product mix exposures. Investing in the winners becomes a difficult task when mixing in the geopolitical tensions between U.S. and China, which could block out markets for certain companies depending on where they are based. U.S. companies like NVIDIA could lose access to the Chinese market and vice-versa.
Making it even more difficult to invest in the semiconductor sector is the broad range of valuations across the space, which infers a variety of investor opinions on the quality and growth prospects of publicly-traded semiconductor companies.
We can observe an extreme dispersion in the price-to-earnings ratio (P/E) multiples within chipmakers:
Forward P/E Multiples of Semiconductor Stocks (as of May 26, 2023)
For those looking to gain exposure to the space without picking up the idiosyncratic risk that comes with individual stock selection—an ETF can be a more-than-ideal way to gain exposure to the AI revolution. There is an abundance of expected growth that potentially equates to a rising tide that “lifts all boats” within the space, which could benefit a broad ETF.
Horizons Global Semiconductor Index ETF (CHPS) tracks the Solactive Capped Global Semiconductor Index, holding more than 50 global semiconductor companies at 0.55% management expense ratio as at December 31, 2022.
The top ten holdings of CHPS as at May 26, 2023, are as follows:
- NVIDIA Corp
- Broadcom Inc
- Taiwan Semiconductor Manufacturing Co Ltd – ADR
- ASML Holding NV
- Advanced Micro Devices Inc
- Texas Instruments Inc
- Qualcomm Inc
- Intel Corp
- Applied Materials Inc
- Analog Devices Inc
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