As experiments with the viral ChatGPT model continue and users test the technology’s limits and capabilities, new use cases for AI applications are emerging, and investors are seeking ways to invest in the promising sector. Could this mark the reversal of a historic low for the semiconductor industry?
- Nvidia’s stock jumped 42% in January, Seagate’s share price is up 28.87%, and Qualcomm is up 24.28% in the last month.
- Samsung is increasing its capital expenditure despite the current demand-supply gap in the chip industry.
- The iShares PHLX Semiconductor ETF is up 16.31% in the last month.
Wall Street is betting on the semiconductors industry in attempts to capitalise on investment opportunities related to the AI revolution that OpenAI’s popular language chatbot ChatGPT has brought about, threatening to disrupt sectors and replace jobs.
Nvidia Corp. [NVDA], as a dominant name in the space, is among the sector’s biggest winners, with its shares jumping as much as 42% in January and adding $5.1bn to CEO Jensen Huang’s wealth, making him one of the largest percentage gainers in net-worth among US billionaires in 2023 so far, according to the Bloomberg Billionaire Index. Nvidia’s shares have rallied at least 59% from their lowest point last year in October 2022.
Analysts at Barclays upgraded their ratings on chipmakers Advanced Micro Devices Inc. [AMD], Qualcomm Inc. [QCOM] and Seagate Technology Holdings [STX] on expectations that the sector is unlikely to revisit multi-year lows reached in October 2022. Seagate’s share price is up 28.87%, while Qualcomm is up 24.28% in the last month.
New AI use cases for semiconductors
Analysts at Bank of America and Wells Fargo highlighted Nvidia as one of the strongest beneficiaries of the Chat-GPT-induced AI hype. Wells Fargo said Nvidia’s upcoming chip models are positioned to meet the demand for the additional computing requirements resulting from the new AI models.
Citigroup strategists said the chipmaker could stand to benefit in sales of between $3bn and $11bn over the year from ChatGPT’s growth, Bloomberg reported. Analyst Atif Malik came to this range based on estimations for the number of words generated by ChatGPT and revenue per word for Nvidia.
Nvidia has made a name for itself in creating chips for vehicles and robots, as well as graphics chips made for complex computing functions that power AI applications. As ChatGPT grows and adds more users to its database, the tool will require more computing power and memory capabilities to answer the queries and execute user demands and prompts, which can range from students asking for help with homework to software engineers asking it to write long pages of code and anything in between.
Hope for the struggling chip industry
The new investor confidence in chip stocks brings hope to the battered semiconductor industry, which is facing a historic low, with prices plummeting on the back of dwindling consumer demand as people cut spending on gadgets after supply increases with accelerated post-COVID production.
While most chipmakers cut capital spending to recover from the gap between their excess inventory and consumer demand, South Korean electronics manufacturer and chipmaker Samsung raised eyebrows with its unexpected decision to go against the trend and ramp up its expenditure on new capacity instead.
Samsung went ahead with this decision despite warning that it expects the chip industry to begin recovering in the second half of the year and demand for smartphones to shrink in 2023.
The move is likely to put pressure on smaller rivals who would struggle to keep up with pricing but could also indicate optimism returning for the chip industry’s future.
Funds in focus: iShares PHLX Semiconductor ETF
The iShares PHLX Semiconductor ETF [SOXX] provides exposure to various chip stocks, with an 8.87% weighting in Nvidia, its largest holding. The fund also includes other dominant players in the industry, including an 8.27% holding of Broadcom Inc. [AVGO], a 4.19% holding of Micron Technology Inc. [MU], and a 4.03% holding of Taiwan Semiconductor Manufacturing Co. [TSM]. The fund is up 16.31% in the last month.
The ARK Autonomous Technology & Robotics ETF [ARKQ] offers exposure to companies innovating in the AI and robotics space, including Tesla Inc. [TSLA] and UiPath Inc. [PATH]. The fund is up 19.02% in the last month.