Chipmakers’ Focus on AI Driving iShares Semiconductor ETF

The iShares Semiconductor ETF is benefitting from strong performances by its two largest holdings, US chipmakers Nvidia and AMD. The former is singled out by Goldman Sachs as an October “conviction” stock, while AMD is launching an advanced AI chip to rival Nvidia’s. 

• The SOXX fund soars 39% year-to-date.
• Leading stock Nvidia added to Goldman Sach’s “conviction list”.
• AMD is up 65.5% year-to-date on plans to scale up chip production in the final quarter of the year.

The iShares Semiconductor ETF [SOXX] is up 39% year-to-date, and up 0.9% in the past week.

On 2 October, investment bank Goldman Sachs added US chip giant Nvidia [NVDA], the fund’s second-largest holding, to its ‘conviction list’ of stocks. It singled out Nvidia’s focus on artificial intelligence (AI) as a key factor. Nvidia stock rose 2.3% over the past week, and has leapt 213.2% year-to-date.

The SOXX fund is the second-largest semiconductor ETF, with assets valued at $8.5bn. It offers investors exposure to the chip industry, tracking an index of 36 US-listed companies involved in the manufacture, assembly, design and distribution of semiconductors.

In recent years, the semiconductor industry has faced challenges including supply chain disruptions and uncertain demand due to oversupply. In the four weeks to 6 October, SOXX dipped by 5.2%, greater than the S&P 500’s fall of 3.5%.

However, the SOXX fund’s year-to-date gains have beaten the S& P 500’s 12.2% upturn in the same period, while over the past 12 months SOXX has gained 18.4%.

AI Sending Nvidia and AMD Skywards

The largest holding in the SOXX portfolio as of 6 October is Advanced Micro Devices (AMD) [AMD], with an 8.58% weighting.

AMD’s strong growth in 2023 is a major factor behind the fund’s positive performance. In May, the stock hit headlines after rallying 65% year-to-date. As of 6 October, the share price was up 3.8% in the last week and up 65.6% year-to-date.

Rising demand for technology that supports AI is driving AMD’s performance. The California-based company is planning to scale up production of its MI300 graphics processing unit (GPU), which is used for AI devices, in the final quarter of the year. The uptick in supply will allow AMD to better compete with Nvidia’s H100 GPU offering.

In its second-quarter (Q2) 2023 earnings in early August, AMD posted revenues of $5.4bn. While down 18% year-over-year from $6.6bn, this beat an analyst consensus forecast of $5.3bn, according to a Refinitiv survey.

The second-largest holding in the SOXX fund is Nvidia with a weighting of 7.84%.

NVDA’s share price is on fire this year, driven by its specialist focus on AI chips.

In August, Nvidia announced Q2 2023 results, posting revenues of $13.5bn, a 101% jump year-over-year and up 88% from the prior quarter. Last Monday, investment bank Goldman Sachs added Nvidia to its ‘conviction list’ for October.

“Look for Nvidia to maintain its status as the accelerated computing industry standard for the foreseeable future,” the analysts wrote in a note seen by Proactive Investors.

Nvidia leads the way in AI

The US market is benefitting from the Chips and Science Act, passed by President Joe Biden in 2022. This legislation is designed to boost US chip production, and encourage the onshoring of supply.

Semiconductor demand is steadily rising, but in April research from Gartner suggested that industry revenues would decline 11.2% in 2023 due to oversupply.

However, the surge in AI adoption could drive the theme forwards, according to McKinsey research suggesting the semiconductor market will grow at a CAGR of 7% between 2021 and 2023, largely on the back of computing and data storage.

According to TipRanks, a consensus of analysts rate SOXX a ‘moderate buy’, while an average 12-month price target of $588.67 has 22.6% upside from the ETF’s last closing price of $480.19.

Goldman Sachs maintains a $605 price target on Nvidia shares, reflecting a 26% rise from its last close. At CNN, the consensus among 52 analysts is to ‘buy’ Nvidia shares, with 44 offering this rating. The consensus among 46 analysts is also to buy ‘AMD’ stock.