The once-soaring semiconductor space had hit the wall in late March after Nvidia (NVDA - Free Report) , one of the best performing semiconductor stocks in the S&P 500 over the past year, tumbled 8% upon suspending self-driving car tests on public roads. The announcement came after a self-driving Uber car deploying Nvidia technology struck and killed a woman in Arizona (read: 5 Reason Why FANG ETFs Lost Their Charm in March).
There is another reason for which the semiconductor stocks are little subdued this year. The slump in the cryptocurrency market have hit the space hard. Mining of cryptocurrencies needs the usage of semiconductors. A hardware known as an ASIC (Application-Specific Integrated Circuit) is designed explicitly for mining bitcoin. Sincebitcoin is down about 27% so far this year, semiconductors are sure to fall flat(read: Ethereum ETF? The Bitcoin Crushing Digital Currency Explained).
Overall, VanEck Vectors Semiconductor ETF (SMH - Free Report) was down 2.1% in the last one month (as of Apr 13, 2018), though it is still up 6.6% in the year-to-date frame.
Time to Buy the Dip?
Upbeat Sales Fundamentals
After generating record annual sales in 2017, the global semiconductor industry was off to great 2018. Per the Semiconductor Industry Association (SIA), global sales of semiconductors grew 21% year over year to $30.4 billion in February 2018.
Worldwide sales in February were 2.2% lower than the January 2018 due to seasonality. February marked the 19th successive month of “year-to-year sales increases and growing by double-digit percentages across all major regional markets.”
Tax Reform Benefit
Trump’s tax reform is another tailwind for the space. Big semiconductor companies have huge cash piles overseas and are likely to bring that cash back thanks to the one-time repatriation tax and overall lower tax rate. After repatriation, this cash may be used to dole out dividends to shareholders and used to buy back shares (read: Tax Bill: What ETF Investors Need to Know).
Bitcoin to Bounce Back with Tax Day Pressure Passed?
Many Bitcoin investors expect a price rebound after Tax Day. This is because investors are needed to pay taxes on their cryptocurrency holdings if they realize capital gains. “But since many cryptocurrency exchanges don't send customers tax documents, many may not even know they have to pay taxes on their coins - or how much.” In order to pay the taxes on those gains, “investors may have sold some of their coins”, contributing to selling pressure, according to an article published Business Insider.
Now with tax-paying pressure not in place, bitcoin will likely set in a rally and touch $25,000 by the end of 2018, per the head of research at Fundstrat Global Advisors. If this really happens, semiconductor stocks may see some way up.
Upgrade in Nvidia’s Rating
Morgan Stanley (MS) upgraded its rating for Nvidia shares to overweight from equal-weight this month. The company foresees that the company will report profits above expectations in its fiscal 2019 thanks to its leading positions in the artificial intelligence and gaming markets. This strength will more than make up for the slump in the cryptocurrency market and the resultant loss of the semiconductor companies.
Notably, Nvidia is expected to report on May 8, 2018. The stock has a Zacks Rank #3 (Hold) and an Earnings ESP of +0.76%. According to our methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP increases our chances of predicting an earnings beat.
ETFs in Focus
If investors are bullish on the long-term fundamentals, they can tap the space with the following ETFs.
iShares PHLX Semiconductor ETF (SOXX - Free Report)
PowerShares Dynamic Semiconductor (PSI - Free Report)
SPDR S&P Semiconductor ETF (XSD - Free Report)
First Trust Nasdaq Semiconductor ETF (FTXL - Free Report)
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