Photographer: Andrew Harrer/Bloomberg

Nvidia, Micron Lead Chip Stocks' Surge, Outpacing Top Tech Names

  • Semiconductor index outperforms Facebook, Amazon, Alphabet
  • Proliferation of connected devices, data centers drive demand

There’s the tech rally, then there’s the chipmaker rally. And nowadays the real money is being made in the second group, whose roots go back to the 1950s.

Semiconductor stocks, led by Nvidia Corp., Micron Technology Inc., Advanced Micro Devices Inc. and Lam Research Corp., have gained about 50 percent in the past 12 months, adding about $320 billion in market value to the Philadelphia Stock Exchange Semiconductor Index of 30 companies. That’s better than three of the four stocks that make up the so-called FANG group -- Facebook Inc., Inc. and Google parent Alphabet Inc. -- and puts the index within reach of a trillion-dollar combined valuation.

While indications have sprung up that in the past signaled a top for chip stocks, such as record earnings, many investors in the $339 billion-revenue industry are betting the rally will continue.

“I haven’t been this excited about chips in a number of years,” said Dan Morgan, a senior portfolio manager at Synovus Trust, which owns shares of Applied Materials Inc., Intel Corp. and Texas Instruments Inc. “The multiples from a historical perspective are far from off the charts.”

One argument in favor of continued bullishness: Chips are everywhere. Once mainly confined to computers and phones, the tiny devices are now showing up everywhere from washing machines to autonomous driving systems. Consumers are coming to expect even the simplest gadget to think for itself, creating a need for more powerful components and more storage to house the flood of data they create.

The chip and equipment makers in the Philadelphia semiconductor index have a market value of about $980 billion and trade at an average of 23 times current earnings, a multiple often used to compare companies’ value. That’s down from a ratio of 30 at the end of 2016 and below the five-year average of 24, according to data compiled by Bloomberg. By contrast, Microsoft Corp., Facebook, Amazon and Alphabet all trade at more than 30 times earnings. Netflix Inc., the only FANG stock that has outperformed the chip index in the past year, trades at 194 times earnings.

Apple signaled how important chips are to its products when it started designing its own applications processors, which debuted in the iPhone maker’s products in 2010. Google last week announced its first consumer-device chip, and has designed its own co-processors to help with certain functions in its data centers. 

The moves by internet and traditional hardware companies into the business are part of a surge of interest in the components as these companies seek to make their consumer products and data centers more efficient with custom devices. In the effort to create self-driving cars, automakers are increasingly packing their vehicles with electronics to make them aware of the surrounding world and make decisions on how to navigate it.

Thirty-nine-year-old Micron, the second-best performer in the chip index in the past year, is a good example of how investors are seeing things differently. The Boise, Idaho-based company, up more than 140 percent in the past 12 months, is a survivor of arguably the harshest business in technology -- memory chips. Micron reported an annual loss as recently as fiscal 2016, which ended just four quarters ago. From that the company swung to a net income of $5.1 billion in fiscal 2017, and it’s projected to have a profit of more than $8.6 billion in the current year amid demand for memory in more devices and other applications.

Not everyone buys the silicon gold rush. The industry hasn’t fully shaken off its boom-bust cycle, some investors say, and bulls could be blindsided when that leaves companies stuck with inventory that will weigh on earnings.

“We have been selling some of our stakes,” said Ross Gerber, chief executive officer of Gerber Kawasaki Wealth & Investment Management in Santa Monica, California, which owns shares of Nvidia Corp. and a fund that tracks the chip index. “We just hope that we can buy them lower when there’s a correction.”

One test of whether the industry has stabilized for the long term will be the performance of analog-chip makers, companies such as Texas Instruments Inc., which pioneered the integrated circuit in the late 1950s. This group makes simpler chips that translate the real world into digital signals and is on course to become more profitable than the traditional demand cycle would indicate, according to Jefferies & Co. analyst Mark Lipacis. Texas Instruments will report third-quarter earnings after the market closes Tuesday, and the Dallas-based company’s stock rose to a record on Monday.

Chipmakers have spent the past two years combining operations, reducing competition. That means they’re nimbler, have lower costs and will suffer less if orders slow, Lipacis argues. The smaller number of rivals also means that customers are less able to play suppliers against each other and drive down prices.

Unlike the tech-heavy Nasdaq Composite Index, which surpassed its technology bubble high in 2015, the chip index still trades below its March 2000 record.

“This is more real than it was back then in terms of true earnings power, but it’s not without risk,” Bloomberg Intelligence analyst Anand Srinivasan said, referring to the March 2000 peak in the semiconductor index. “The moment there is a plateau in sales growth or earnings growth, people will sell.”

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