Semiconductors will grind higher despite U.S.-China tensions – analyst

[3D rendering of cyberpunk AI. Circuit board. Technology background. Central Computer Processors CPU and GPU concept. Motherboard digital chip. Tech science background.]
jiefeng jiang

The semiconductor (NASDAQ:SMH [https://seekingalpha.com/symbol/SMH]), (SOXX [https://seekingalpha.com/symbol/SOXX]), (XSD [https://seekingalpha.com/symbol/XSD]) ecosystem will continue to grow despite recent trade tensions between the United States and China affecting chipmakers like Qualcomm (QCOM [https://seekingalpha.com/symbol/QCOM]), said Joshua Buchalter, TD Cowen senior analyst.

In an interview by CNBC, the analyst suggested that many of the investigations and export restrictions are being used as negotiating tactics in a larger trade deal that could be announced in the coming months.

“There’s no way to spin it. Increased tech trade tensions between the U.S. and China is not good for the semiconductor index (NASDAQ:SMH [https://seekingalpha.com/symbol/SMH]), (SOXX [https://seekingalpha.com/symbol/SOXX]), (XSD [https://seekingalpha.com/symbol/XSD]),” he said.

However, he downplayed concerns about the Qualcomm (QCOM [https://seekingalpha.com/symbol/QCOM]) investigation, noting it relates to “a tuck in acquisition in their auto business” that likely has “very minimal contribution to their revenue today.”

Regarding Qualcomm (QCOM [https://seekingalpha.com/symbol/QCOM]) specifically, Buchalter explained that while the company’s auto business represents about $4B in revenue, the bigger concern would be if restrictions expanded to their smartphone business. “We really think that’s unlikely. Qualcomm (QCOM [https://seekingalpha.com/symbol/QCOM]) is heavily embedded in the smartphone market, and there aren’t obvious and easy replacements for the breadth of their products,” he said.

When discussing AI and valuations in the sector, Buchalter expressed optimism about companies like NVIDIA (NVDA [https://seekingalpha.com/symbol/NVDA]), which he doesn’t consider overvalued despite its nearly $5T market cap.

“If I look at where NVIDIA (NVDA [https://seekingalpha.com/symbol/NVDA]) is trading… at high 20s [multiple], low 30s multiple for the growth rates that they’re putting up and for how important they are to the global compute ecosystem, I actually don’t think it’s over it’s all that expensive,” he said.

The analyst pointed to three simultaneous growth factors driving the semiconductor industry: increasing users, growing complexity of applications and workloads, and expanding use cases for AI.

“I actually think the demand for compute and the gap between supply and demand of where we are today has actually grown over the last twelve months,” he concluded, suggesting that “without these external factors disrupting things, which are impossible for people to predict, I do think this ecosystem is going to continue to grind higher.”

MORE ON VANECK SEMICONDUCTOR ETF:

* SMH: Likely To Keep Outperforming The Market And Move Higher [https://seekingalpha.com/article/4829143-smh-likely-to-keep-outperforming-the-market-and-move-higher]
* SMH: AI Mania In Full Swing - Peaking Volumes Imply Potential Implosion (Downgrade) [https://seekingalpha.com/article/4828826-smh-ai-mania-in-full-swing-peaking-volumes-imply-potential-implosion-downgrade]
* SMH: AI Bubble? Chip Stocks Are Rewriting History [https://seekingalpha.com/article/4827469-smh-ai-bubble-chip-stocks-are-rewriting-history]
* AMD's pop puts chip stocks in spotlight: 10 semiconductors to watch via SA Quant metrics [https://seekingalpha.com/news/4502088-amds-pop-puts-chip-stocks-in-spotlight-10-semiconductors-to-watch-via-sa-quant-metrics]
* Weekly tech check: Western Digital rises on AI demand, while Paycom drops on valuation concerns [https://seekingalpha.com/news/4501812-weekly-tech-check-western-digital-rises-on-ai-demand-while-paycom-drops-on-valuation-concerns]