Semiconductors had a stellar 2020.
The SMH VanEck Vectors Semiconductor ETF—which tracks the biggest names in the sector—gained nearly 55% for the year, with some of the space’s most recognizable companies in the space rising far more.
Advanced Micro Devices (NASDAQ: AMD) added 100%. Lam Research (NASDAQ: LRCX) gained nearly 62%. Marvell Technology (NASDAQ: MRVL) climbed 79%. Nvidia (NASDAQ: NVDA) surged 122%. And Taiwan Semiconductor (NYSE: TSM) rose 88%.
But the sector has hit a wall in recent weeks, with AMD dipping just over 2% over the last month and Nvidia shares sliding nearly 4% in the same time frame.
MKM Partners chief market technician JC O’Hara says, however, says these recent falls give investors a compelling buying opportunity.
“This is a market where you want to own leadership,” O’Hara said. “That’s the only way for you to outperform a benchmark. When we look at the 19 semiconductor names within the S&P, we find leadership in Nvidia and AMD.”
“In the short term, they might become victims of their own success,” the trader added. “If you’re an institution and you own these names and these names doubled in size, come the end of the year, you need to rebalance. You need to resize. But this gives us an opportunity to buy a pullback within leadership.”
“I’m looking at being able to buy leadership at a discounted price,” O’Hara concluded. “So, yes, I’m looking to buy the pullback in Nvidia and AMD.”
Chantico Global CEO Gina Sanchez also noted that chipmakers’ fundamental profiles look “incredible.”
“I wouldn’t read too much into this pullback,” Sanchez said. “Quite frankly, what’s driving the SMH really is Taiwan Semiconductor. And Taiwan Semiconductor has just been taking the cake from Intel (NASDAQ: INTC). I think the best comment I heard was that Intel has been suffering tragically comic missteps. It has definitely been giving away a lot of revenue to the rise of the industry, and Taiwan Semiconductor has been there to benefit from that as the other single-largest foundry in the world.”
Intel shares slid nearly 17% in 2020. Activist firm Third Point urged the company’s board of directors to hire an investment adviser to explore “strategic alternatives” this week as the chipmaker loses market share to Taiwan Semiconductor, Samsung, and AMD.
“The loss of manufacturing leadership and other missteps have allowed several semiconductor competitors to leverage TSMC’s and Samsung’s process technology prowess and gain significant market share at Intel’s expense,” Third Point’s Dan Loeb wrote in a letter to Intel’s board in which he also suggested the company divest of “failed acquisitions.”
Sanchez added that multiple catalysts—including cryptocurrency mining, online gaming, and data center storage—are still strongly in place, which is good news for Nvidia and AMD.
“The fundamentals are great,” Sanchez said. “The entire semiconductor space has had a multiple expansion that has been extraordinary.”