Will Plunging Crypto Mining Demand Hurt Semiconductors? (SOXX)

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August 20, 2018 6:11am NASDAQ:SOXX

semiconductor stocks

From Zacks: The once-soaring semiconductor space had hit the wall this year with ETFs returning more-or-less 3% so far (as of Aug 16, 2018). Factors that thwarted growth in the space this year were news of Nvidia‘s (NVDA – Free Report) suspension of self-driving car tests on public roads in March, heightened trade war talks between the United States and China and the slump in cryptocurrency price (read: Should You Snap Up Downtrodden Semiconductor ETFs Now?).


Falling Crypto Demand

Semiconductor ETFs have been on a bumpy ride so far this year. And to make matters worse, Nvidia’s shareslost about 5% in after-hour trading on Aug 16 after the company indicated that cryptocurrency-fueled demand had dried out and its sales guidance was below Wall Street targets. Investors should note that mining of cryptocurrencies needs the usage of semiconductors.

Nvidia earlier guided sales for cryptocurrency chips for the fiscal second quarter ended Jul 29 to be about $100 million, while actual revenues came in at only $18 million. This is in stark contrast to $289 million (almost a 10th of Nvidia’s revenues) recorded in the prior quarter.

Investors should note that one of the key cryptocurrencies, bitcoin prices, have fallen about 67% this year to $6314 (as of Aug 16) from December’s high of $19,343, indicating trouble in the space.

Several regulatory agencies and central banks are doubtful about the merit of cryptocurrencies like bitcoin.The Securities and Exchange Commission (SEC) is tensed about the extreme price volatility in cryptocurrencies. Several central banks have also issued warnings against it (read: Bitcoin Falls After SEC Postpones ETF Decision).

Needless to say, such news is likely to weigh on semiconductor ETFs in the coming trading sessions. But should you be spooked by the falling crypto demand?

Areas That Can Bolster Semiconductor ETFs

Upbeat Sales Fundamentals

Global sales rose more than 20% year over year for 15 successive months. Also, upbeat data on personal computer (PC) shipments, which have been weak over the past several years, should boost investors’ confidence in the sector. This is especially true as global PC shipments had enjoyed the strongest quarter in six years with 2.7% growth in Q2, per the International Data Corp (IDC) and the first year-over-year increase of 1.4% since first-quarter 2012, according to Gartner (see: 5 Top-Ranked Tech ETFs to Buy on Strong PC Growth).

Rise of Artificial Intelligence

Artificial Intelligence is a hot theme now. The rapid adoption of advanced information technologies including cloud, Internet of Things, autonomous cars, gaming, wearables, drones and artificial intelligence should keep supporting semiconductor ETFs.

Amazon’s (AMZN – Free Report) Amazon Web Services, Microsoft Corp’s (MSFT – Free Report) Azure and Alphabet Inc’s (GOOGL – Free Report) Google Cloud are purchasing chips to “power artificial intelligence and other functions”, per a source.

US-China to Recommence Trade Negotiations

One of the reasons why Semiconductor stocks took a beating this year was the trade truce between the United States and China. Per Morgan Stanley equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52%” and are thus exposed to maximum risks on rising trade tensions.

Now,there is news that the United States and China are ready to restart trade talks or negotiations next week to prevent a full-blown trade war, “the first such meeting since July.” If trade tensions abate, these stocks could soar higher (read: 5 Sector ETFs Most Exposed to Trade Tensions).

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 to buy back shares (read: Tax Bill: What ETF Investors Need to Know).

ETFs in Focus

Against this backdrop, investors can definitely play the downtrodden semiconductor ETFs. Below we highlight a few ETFs.

Semiconductor Vaneck Vectors ETF (SMH – Free Report)

Invesco Dynamic Semiconductors Portfolio (PSI – Free Report)

SPDR S&P Semiconductor (XSD – Free Report)

iShares PHLX Semiconductor ETF (SOXX – Free Report)

The iShares PHLX Semiconductor ETF (SOXX) was unchanged in premarket trading Monday. Year-to-date, SOXX has gained 6.04%, versus a 7.25% rise in the benchmark S&P 500 index during the same period.

SOXX currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #14 of 67 ETFs in the Technology Equities ETFs category.


This article is brought to you courtesy of Zacks Research.


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