'Volatility is par for the course' for semiconductor stocks in Q2, says BofA's Vivek Arya

Why do you? Why are you less worried than some about semis? Sure. I think that volatility is par for the course for the semiconductor sector. If I look at the last decade, we have had 10 to 1210% plus corrections in in the sector. But the Sox index has compounded 26% annually, which is 2 times what the S&P 500 has done. So it is a volatile sector. It does very well in Q1 and Q4. But as we get into Q2, that’s when just before earnings, there happens to be this bout of volatility. In fact, April, the month of April has been down eight out of the last 10 years. But you know what, the month of May has been up the last nine out of the 10 years. So that’s the seasonal. But more importantly, when you look at the growth leader in the space, which is NVIDIA, the addressable market for them is growing. Their execution is extremely strong right now. Their pipeline is extremely strong and most importantly the stocks valuation at about 25 times next year’s numbers. That’s exactly where the stock has dropped the last three times it went through this kind of volatility. So we think that volatility is part of the course for the sector and the growth leader is doing extremely well right now. And so you you like NVIDIA, but what about other names in the semi area that you like as well and some that you might avoid? Sure. So I think the analysis really starts with where can we trust the spenders. So if I look across all the different end markets, the spenders that are really investing the most heavily are All in all in the data center because they are in early phases of building out their large language models of building out their cloud infrastructure. We think we are just in year 2 of what is probably at least a three to four year deployment cycle for them. So we like most of the names exposed to the data center, NVIDIA as a topic, but also names such as Broadcom, such as Micron, Marvel, AMD and I think number of these names benefit because they are all exposed to different parts of that build out. Some are doing better on the computing side, some are doing better on the memory side, some are doing better on the networking side, but all three of those sides have to essentially come together to help the cloud customers build out this infrastructure. Are there winners potentially in areas that are not so directly tied to data center? We hear a lot about the data centers, but obviously that’s but one area of of sales opportunity for for semiconductor companies. Are there other areas, other companies that could that could see growth? Yeah, Tyler and you might have hear us talk about the three C’s of semis, cloud cars complexity. These are the three places where we think there is enduring growth in the sector. So cloud computing we just discussed. I think the next interesting area is just the rising complexity of chip making. So names such as KLA, Applied Materials, Cadence, Synopsis, I think these names are levered to the secular growth and complexity of designing these ships of manufacturing these high end systems. So complexity area we like. And then cars, I know that there’s a lot of concern about just the pace of EV adoption, but if you look at an average car that sells globally, it is the cost is about $35,000 and the amount of semiconductors in it is only 2% or only $700.00. But look at every feature the consumer cares about whether it’s electrification, safety, security, infotainment. So we think over long periods of time as much as it is cyclical, We do think that automotive semiconductors, their names such as NXP Semiconductor, I think are also positioned extremely well outside of the data center and cloud computing. Does does weakness in the auto sector, for example, Tesla cutting the price, which is certainly a signal that they need to juice up their sales. Does that worry you at all here? Yeah, for sure. I do think that last year global auto production was up 9%. You know, we saw 30 plus percent growth in EVs. This year auto production will probably be flat and the growth in EVs is probably going to be more like 1520%. Now as much as Tesla may not grow this year or the growth rate is being challenged, remember that growth rate of EVs outside the US is doing quite well. In China, for example, is doing very well and that’s the important thing about the semiconductor industry that these are companies that are exposed to the global market, not just the US market. So for let’s say a Tesla that may or may not be doing well. You have the secular adoption of semiconductors in across hybrids, across traditional eye scars, you know, because every consumer cares about safety, security, you know, infotainment. So it’s not just EVs. I think outside of that, there is semi adoption and then look at customers outside of the US as well. So it’s it’s a global industry and then valuations also I think are a lot more reasonable. NXP trading at 16 times this year, 14 times next year. I think it’s extremely compellingly valued at this. Very interesting. OK, Vivek, thank you so much, Vivek. Arya, we appreciate your. Thank you, Tyler.