Investing in semiconductors – the boom, the slowdown and the opportunities

The semiconductor boom is over for now, but some product areas are still forecast to grow in 2023.

We take a closer look at what caused the boom, why sales are simmering, what could be next and where the opportunities could be.

What caused the boom?

As we exited the pandemic, it seemed the world couldn’t get enough of semiconductors. These microchips are essential for computers and mobile phones to function, as well as a whole range of other smart and connected devices from washing machines to cars.

Demand soared, as consumers with cash in hand and little to do splashed out on new technology. But Covid-19, the war in Ukraine and a string of natural disasters that impacted major factories, meant supply couldn’t keep pace. Prices were raised and the industry achieved record profits.

Why are semiconductor sales simmering?

But soaring inflation and tightening interest rates have taken their toll on the global economy over the course of 2022 and global semiconductor sales have begun to decline in recent months.

As the reality of the cost-of-living crisis impacts household spending power, it’s only natural that consumers are thinking twice about upgrading to the latest smartphone or laptop.

Global semiconductor sales

Scroll across to see the full chart.

Source: Semiconductor Industry Association, 05/12/2022.

There are also headwinds building on the supply side. The chip shortages of recent years could be replaced by oversupply. Electronics companies reacted to supply-chain constraint by stock piling chips.

Combine this with falling demand for their end products and it’s no surprise the outlook for 2023 is somewhat negative – the market’s expected to shrink by 4.1% next year.

The semiconductor industry is notoriously cyclical – this means it ebbs and flows with the wider economy. This makes it tricky to call when sales will rebound again.

But it’s not all doom and gloom. Some product categories are still forecast to grow next year, which we believe are underpinned by longer-term trends.

Where could the opportunities be?

The automotive industry’s thirst for processing power is unlikely to subside.

The shift to electric vehicles, driver assistance and even self-driving cars is behind this. It’s also one sector where chips are still in short supply.

Other areas likely to drive further growth for certain chip categories are artificial intelligence (AI) and cloud computing.

The semiconductor industry is viewed by governments as strategically important. As well as moves to reduce China’s abilities to dominate the sector, there’s growing support by western governments to boost domestic manufacturing capabilities. This can be a double-edged sword though, particularly for those serving the Chinese market.

Company valuations in the sector have already fallen considerably this year. But each stock needs to be judged on its own merits as some are better placed to benefit than others.

Next week, we’ll be taking a closer look at two shares that could be well placed to take advantage of these opportunities.

To make sure you don’t miss out on our best insights and ideas, including these two share ideas, sign up to our weekly Share Insight email.

These articles aren’t personal advice. If you’re not sure what’s right for you, seek advice. All investments can rise as well as fall in value, so you could get back less than you invest.

Estimates are a consensus of analyst forecasts provided by Refinitiv. These are not a reliable indicator of future performance.

Share Insight: our weekly email

Sign up to receive weekly shares content from HL.