A world of mixed strengths and weaknesses in the semiconductor market. What's the next move?

Table of Contents

l Strong demand for ai, alleviating overvaluation of semiconductor-related stocks.

l The semiconductor market is dominated by major companies.

l New investment strategies for semiconductors are emerging.

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l The demand for AI is strong, and the overvaluation of semiconductor-related stocks has been resolved.

Since July, semiconductor-related stocks worldwide have been undergoing adjustments. The main reasons for the decline include reports that in July, the USA warned allies of stricter rules in semiconductor regulations against China, and the increased likelihood of President Trump's reelection due to his desire to strengthen the US-China trade policy.

In particular, the performance of Japanese semiconductor-related stocks has been weak, significantly underperforming the Nikkei Stock Average. Figure 1 decomposes the Japanese semiconductor stock index into estimated EPS (earnings per share) and estimated PE ratio (price-earnings ratio). Expected PEs have decreased significantly from July to August, indicating a revision of investors' expectations. As a result, the current expected PE is around the historical average, and the overvaluation has been relieved.

The semiconductor industry experiences cyclical prosperity and downturns known as the Silicon Cycle. Figure 2 shows the growth rates of the SOX index and worldwide semiconductor sales growth rates (both compared to the same month of the previous year), with the SOX index remaining in positive territory for 19 consecutive months. As positive periods typically last around 24-36 months, it is currently believed to be approaching the middle to late stages of the Silicon Cycle.

In the earnings reports of semiconductor-related companies announced in October, the Netherlands' ASML, which specializes in advanced semiconductor lithography equipment, significantly missed its order expectations, and Renesas Electronics, which handles microcontrollers for industrial/infrastructure/IoT (Internet of Things) purposes, also revised its plans downwards. These instances highlight a weakness in demand in certain sectors.

On the other hand, the demand for AI semiconductors remains strong. Taiwan's TSMC, the world's largest foundry, announced that its AI-related revenue for the full year 2024 is expected to triple compared to the previous year, accounting for around mid-10% of its total revenue. Additionally, Advantest, holding a world-class share in semiconductor testing equipment, indicated that they expect no change in the trend of benefiting from the increased complexity of AI semiconductor testing, foreseeing continued robust demand. They suggest that demand for AI-related testers will remain strong at least until the first half of fiscal year 2025.

It is anticipated that there will be significant price fluctuations in response to the policies of President Trump's administration starting in January next year, as well as the earnings reports of semiconductor-related companies. However, the expanding semiconductor demand due to society's digitalization and the advancements in AI are expected to further increase demand. The global semiconductor market is projected to expand to approximately $1.1 trillion, doubling from 2023 to 2030. Thus, moments of price decline are expected to be entry points for medium- to long-term investments. *ASML forecast.

l The semiconductor market is dominated by major companies.

Let's review the semiconductor industry again.

The global semiconductor market is a unique market characterized by oligopoly dominated by major companies throughout the entire supply chain. The market is highly concentrated, with the top 5 companies holding approximately 90% and 56% market share in memory and logic semiconductor segments respectively. This domination extends beyond semiconductor chips to foundries responsible for manufacturing, where the top 4 companies account for about 82%, as well as essential materials like silicon wafers where the top 3 companies hold around 74% market share. Moreover, key manufacturing equipment is controlled by the top 5 companies with approximately 73% share. Due to the significant capital investment required for facilities in the field of semiconductor manufacturing process due to its high precision, it is difficult for financially weaker new entrants to participate.

Japanese companies have strengths in semiconductor manufacturing equipment, components, and materials. They have gained market share with high competitiveness, holding about 31% in manufacturing equipment and about 48% in components/materials, supporting the global semiconductor market.

In other words, in the semiconductor industry where oligopoly by major companies is advancing, it is believed that by selecting companies that lead technological innovation and compete at a high level, it is possible to capture the overall growth of the semiconductor market.

l A new investment strategy for semiconductors is emerging.

In the target index, among Japanese companies that generate over 20% of their revenue from the semiconductor industry, the top 10 stocks by market capitalization are selected. Figure 5 includes all 10 constituent stocks, such as Advantest and Tokyo Electron, boasting world-class technological capabilities in manufacturing equipment, Shin-Etsu Chemical Industry ranking first globally in silicon wafers, and the second-ranked SUMCO.

Semiconductor-related stocks are characterized by high stock prices per share and a high value per share. Investing in the minimum unit of 100 shares may exceed the annual limit of 2.4 million yen for the NISA Growth Investment Scheme due to some stocks. The trading unit of this ETF is 1 unit, and with a standard price of about 1,000 yen per unit, it allows investment in the 10 semiconductor-related stocks from a small amount.

Figure 6 shows the performance trend of the target index. It has been performing significantly better than the TOPIX, and with the continued expansion of the global semiconductor market expected, the market growth with Japan's representative 10 stocks is anticipated to deliver high performance in the medium to long term.

Due to being a concentrated investment with 10 stocks, this ETF is susceptible to stock price fluctuations of its constituents, making it prone to significant short-term price movements. However, ETFs can be traded in real-time, allowing for flexible buying and selling strategies based on market movements. Additionally, with a management fee of 0.11% inclusive of tax, it can be utilized for medium to long-term investments in NISA Growth Investment Scheme.

Further explanations on the ETF are provided in the following video. Please watch it for more details.