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Analyst Warns on Semiconductor Stock Valuations
The market capitalization of publicly-traded semiconductor companies has risen dramatically over the past three years, driven largely by a frenzy of merger and acquisition activity and the performance of the chip market as a whole, according to International Business Strategies (IBS).
The cumulative valuation of 15 selected non-memory companies studied by IBS rose from about $520 billion in 2015 to more than $1.07 trillion today. Expectations of additional M&A activity and a positive assessment of the long-term prospects for the semiconductor industry among analysts and investors have also helped the cumulative valuation of the group more than double, according to IBS, a research and consulting firm based in Los Gatos, Calif.
But Handel Jones, CEO of IBS, cautioned that high growth in chip company valuations — a boon to many employees and investors — does not fully reflect the possibility of a semiconductor industry downturn related to overcapacity or slowing global GDP. He warned that the probability of a downturn in the semiconductor industry in the next 24 months is greater than 50 percent.
"There can be benefits to selling [chip stocks] when the sentiment is positive," Jones said.
Semiconductor industry consolidation has risen to unprecedented levels in the past three years as chip firms dig deep to broaden their product portfolios and grow their addressable markets through acquisition. He added that the M&A activity has reduced the number of players in specific market segments, allowing prices to increase, such as what has occurred in the DRAM market.
"Many acquisitions have provided good financial benefits, but not all have been successful," Jones said.
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