An impending semiconductor bust in 2024 could pose significant risks for investors in the industry, despite the recent all-time highs reached by NVIDIA and Advanced Micro Devices (AMD). While the current AI boom has fueled demand for semiconductors, there are concerns that this surge may be temporary or less profitable than expected. If this proves to be the case, the sector could experience a major decline.
Adding to the potential downturn is the likelihood of a recession in capital spending by Big Tech firms in late 2024 and 2025, as well as increasing competition for high-end chips. These factors suggest that sales and income expansion in the industry may have reached its peak, with a decline on the horizon.
Despite the bullish sentiment surrounding AI chips, a dose of caution is necessary, especially when considering the economic indicators that point toward an impending recession. The government’s leading economic indicators index and the contraction in total banking credit both signal a downturn, which historically correlates with contractions in GDP.
The semiconductor industry, particularly the companies focused on AI, has experienced significant investor buying and price gains. However, this concentrated growth may result in underperformance for the VanEck Semiconductor ETF (SMH) in a bust situation, compared to other sector ETFs.
Examining past semiconductor busts, such as the dotcom era crash in the early 2000s and the Great Recession in 2008-2009, it becomes clear that investor sentiment can quickly turn sour, leading to substantial losses. In both instances, the VanEck Semiconductor ETF experienced significant declines.
Furthermore, industry valuations for companies such as NVIDIA and AMD are currently at double their 2016 levels, despite the rise in interest rates. This suggests that the market may be overvaluing these companies, especially considering the potential headwinds of a recession and fierce competition in the AI chip market.
While the semiconductor industry has enjoyed a remarkable run, it is crucial for investors to exercise caution and consider the potential risks on the horizon. With the possibility of a semiconductor bust in 2024, it may be wise to reevaluate investment strategies and assess exposure to the industry.
The source of the article is from the blog toumai.es