By Jacob Sonenshine
Now is the time to get in on semiconductor stocks.
The growth of artificial intelligence will continue for years, so it makes sense to buy the shares, which have found their footing after a recent decline.
The VanEck Semiconductor exchange-traded fund, which offers a relatively pronounced tilt toward AI semiconductor companies, has been a star, with a gain of more than 200% over the past five years. It peaked at almost $302 in August, dropped to $286 this week, and has now inched back up to $291.
That is an important movement. The mid-$280s area is where buyers have consistently come in to buy brief dips since early July. The fact that the buying support re-emerged in the same area this week shows the market is still willing to pay up for these companies.
Investors' confidence is especially clear from that fact that the fund has bottomed at higher and higher levels after minor drops since April. It is an indication that barring seriously bad news, the market is ready to bid these names higher.
Technical analyst Frank Cappelleri, founder of the research shop CappThesis, called the recent mini-drop "a normal retracement within an extreme and relatively consistent rally."
An encouraging point is that the price stabilized at $286, right around the fund's 50-day moving average of $289. Since the start of 2023, when the AI boom announced itself, the chip fund has almost always found support near its 50-day moving average and then gone on to rally for a period of months.
The only time it fell meaningfully below the average was early this year, when President Donald Trump announced tariffs that devastated the entire stock market. Once he delayed many of the levies and rolled back others, chip stocks jumped back over the average and have held the line around it since.
With the chip fund having found its footing near its 50-day moving average, and still only a few dollars above it, investors who had wanted to buy the fund should do so.
The overarching reason is that these companies are still in the early stages of benefiting from AI, which will power growth for a while. Just under 20% of companies throughout the globe have adopted some form of AI, according to Evercore strategists.
If AI is to be as world-changing and as widely used as innovations such as the internet, adoption will eventually near 100%. Evercore estimates, using data from when other inventions were taking off, that 90% of corporations will be using AI by the end of this decade. That spells increasing chip purchases, on the back of investment in AI software and data centers.
Another positive sign is that Broadcom's second-quarter sales and earnings beat expectations. Sales of chips, the largest driver of growth in the quarter, comprise the majority of the business, and were stronger than anticipated, yielding total revenue growth of 22% relative to a year earlier.
Management reconfirmed that demand looks strong. It told investors to expect fourth-quarter sales of $17.4 billion, up 9% from the third quarter and 24% higher than a year earlier, which was more than positive than analysts had penciled in.
The stock gained 10% Friday, yet another signal that traders and investors alike are waiting in the wings to buy chip stocks at current prices, as long as the companies' fundamentals look strong.
One apparent wrinkle is that Broadcom announced it has a new customer that is buying more than $10 billion worth of chips. That news, which seemed to threaten Nvidia's and AMD's market share, sent those stocks down Friday.
Chip investors shouldn't worry, though, because the entire industry is still in growth mode. Buying the chip ETF means acquiring broad exposure to the group, so investors don't have to make bets on winners and losers. The VanEck fund is more heavily weighted toward the AI chip stocks -- Nvidia, Broadcom, Advanced Micro Devices, Taiwan Semiconductor Manufacturing, and Micron Technology -- than other semiconductor ETFs.
Overall, analysts expect aggregate sales for companies in the fund to rise 12% annually from the end of this year thorough 2027, according to FactSet. Assuming operating expenses such as the cost of goods, research and development, and employee pay don't balloon, profit margins can rise and earnings per share can increase 21% annually, analysts forecast.
If growth meets expectations, the stocks should gain.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
September 05, 2025 13:14 ET (17:14 GMT)
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