Kate Lin: Welcome to Morningstar. It has been a good year for stocks like NVIDIA, fueled by optimism about demand for chips for artificial intelligence. Morningstar Global Semiconductors Index has been up over 70% year to date. Are there still opportunities in the chip space into 2024? Phelix Lee from Morningstar is here today to tell us about his stock coverage.
Fears of a Chip Capacity Glut Aren't Over
Phelix, first, where are we at in the cycle now and are we running into an oversupply?
Phelix Lee: Hi, Kate. So right now, in the semiconductor space, we are seeing some early signs of recovery in the smartphone and PC space. So for example, PC and smartphone shipments are recording a slight, a modest quarter-on-quarter growth versus a few consecutive quarters of decline in the past. So we think the bottom of the smartphone and PC is already behind us. And, 2024 should be a year of recovery.
But elsewhere in the, for example, auto and industrial sectors, the signs of weakening haven't gone away completely. So we're still probably a few months away from the ongoing inventory correction. I think, in general, we are kind of seeing a glut right now. But, 2024 we should see some improvement in the supply-demand dynamics.
Why Should Investors Buy Now?
Lin: So with this recovery of demand in mind, is now a good time to buy into chip shares, given some of them are up quite a bit in 2023?
Lee: Well, I think the semiconductor space in 2023 is really dominated by headlines such as Nvidia's AI chips. However, the entire sector, as I said before, PC, smartphones, auto, industrial are all not doing very well, especially in the first half of the year. But that's why I think, given that 2024 is a year of recovery, it's probably a good time to buy semiconductor stocks at this point.
2 Top Taiwan Chip Stocks
Lin: Our top pick for earlier this year is TSMC. Have your views changed since then?
Lee: Well, TSMC remains our top pick. We have a fair value estimate of TWD 900 per share, which we think is supported by a secular or structural growth in smartphones, AI, non-AI servers, automotives, and industrials. It's basically a very comprehensive set of growth drivers. We still think it's our top pick right now because it's still quite cheaply valued.
The other top pick that we have right now is Mediatek. Even though the stock has rebounded like 30 to 40% year to date, we still think Mediatek is enjoying growth from 5G chip content as well as non-smartphone content from 2026 onwards, such as application-specific semiconductors and automotive electronics.
Lin: Phelix, that's very clear. Thank you so much. For Morningstar, I am Kate Lin.
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