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Semiconductor Strength: Bullish Move Just Getting Started?

Technology stocks continue to display signs of outperformance this year, reversing course from last year’s bear market. The Nasdaq 100 index, which boasts the largest tech companies on the cutting edge of transformative themes such as artificial intelligence, big data, and cloud computing, has now exceeded the early February high in a bullish breakout. Semiconductor stocks are helping to push the tech-heavy index to new highs for the year.

The Invesco QQQ Trust ETF QQQ, which tracks the Nasdaq 100 index, has witnessed steady outperformance, soaring nearly 28% to start the year:

StockCharts
StockCharts


Image Source: StockCharts

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Semiconductors Showing Relative Strength

One area of the market that has been navigating the general volatility and helping push the QQQ ETF higher is semiconductors. Looking at the return of the VanEck Vectors Semiconductor ETF SMH over the past five months, we can see how it has helped big tech rally to year-to-date highs. The SMH ETF has surged over 38% in 2023:

StockCharts
StockCharts


Image Source: StockCharts

The VanEck Vectors Semiconductor ETF has exceeded the Nasdaq 100 ETF’s performance this year by more than ten percentage points. The relative outperformance of the SMH ETF, particularly during a pronounced sentiment shift this year, is a clear sign that these stocks are in high demand. Both the QQQ and SMH ETFs contain a market leader we will discuss below.

This market leader is part of the Zacks Computer and Technology sector. Not surprisingly, this sector has done well this year with a return of nearly 25%:

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Historical studies have shown that about half of a stock’s future price appreciation is due to its sector and industry group combination. Also note the favorable characteristics for this sector:

Zacks Investment Research
Zacks Investment Research
Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

By targeting stocks within leading sectors, we can dramatically improve our stock-picking success. Let’s examine a leading semiconductor company in more detail.

NVIDIA Inc. (NVDA)

Of course, no conversation around semiconductors would be complete without mentioning the top dog in NVIDIA. NVDA makes up nearly 6% of the total QQQ ETF holdings, as well as more than 15% of the total SMH ETF holdings.

NVIDIA provides graphics along with computing and networking solutions globally. The company offers solutions for gaming platforms, enterprise workstations, software for cloud-based virtual computing and 3-D design, and automotive platforms for infotainment systems. NVIDIA also provides data center platforms and systems for use in artificial intelligence (AI), autonomous driving, accelerated computing, cryptocurrency mining, and robotics.

NVIDIA has been at the forefront of the generative AI (think ChatGPT) conversation, as the company headlines the graphics chips that are designed for complex computing applications. NVDA, currently a Zacks Rank #3 (Hold) stock, has surged nearly 160% this year.

NVDA resumed a long history of earnings beats earlier this week, as the company reported better-than-expected results for the first quarter. Earnings of $1.09/share easily outperformed the $0.92 consensus estimate (18.48% surprise), while revenues of $7.19 billion also exceeded the $6.52 billion projection. The kicker was the upbeat revenue guidance – $11 billion versus the $7.1 billion stated previously.

“The computer industry is going through two simultaneous transitions – accelerated computing and generative AI,” NVIDIA CEO Jensen Huang said in a statement.

Analysts have revised their earnings estimates higher for the current fiscal year by 1.11% over the past 60 days. The Zacks Consensus Estimate now stands at $4.54/share, reflecting potential growth of 35.93% relative to last year. Keep in mind that this figure is likely to increase further as the year goes on.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

In a market environment where many companies are witnessing a decline in earnings from the previous year, NVIDIA and other semi stocks are shining a bright light. Strong earnings projections, technology outperformance, and a bullish AI theme all point to continued strength in semiconductors. Make sure to keep an eye on NVIDIA, a leader in this group.

Disclosure: NVDA is a current holding in the Zacks Headline Trader portfolio.

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NVIDIA Corporation (NVDA) : Free Stock Analysis Report

Invesco QQQ (QQQ): ETF Research Reports

VanEck Semiconductor ETF (SMH): ETF Research Reports

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