Tech stocks have been on a wild ride this year. The sector has surged, pulled back, rallied, then dropped again—its oscillations tracking big swings in the prices of sector bellwethers including Nvidia (
Driving much of that action has been investors' search for answers on the future of artificial intelligence (AI): How big is AI really going to be, and how long will adoption take? What's the dollar value of the business opportunities presented by AI? And how much of that opportunity has already been priced into the stocks?
"We're in the very early stages of AI," says Adam Benjamin, manager of the Fidelity® Select Technology Portfolio (
But with any nascent, fast-growing technology, there's bound to be some bumps as the lay of the landscape shifts rapidly. "There will be volatility as investors try to figure out which companies will win, which will be disrupted, and what it's all likely to mean for their businesses and share prices," says Benjamin. In addition to that inherent uncertainty, there's this year's US elections, which may impact the regulatory approach to this novel, transformational technology for the next 4 years.
Yet Benjamin says that if you cut out the noise of the news cycle, there are good reasons for bullishness on the sector—and in particular on semiconductor stocks, which may benefit from a convergence of shorter- and longer-term trends, regardless of the outcome in November.
"I think many semiconductor stocks could benefit from major tailwinds, including but not limited to AI," Benjamin says. "I'm seeing an exponential increase in data storage, processing, and transmission across virtually every business sector. All of that requires semiconductors."
Here's more on several key trends that may help support semiconductor stocks.
Fund top holdings1
Top-10 holdings of the Fidelity® Select Technology Portfolio (
- 20.4% – Nvidia Corp. (
) - 20.3% – Apple Inc. (
) - 12.3% – Microsoft Corp. (
) - 4.3% – Marvell Technology Inc. (
) - 4.3% – ON Semiconductor Corp. (
) - 4.1% – ServiceNow Inc. (
) - 3.9% – NXP Semiconductors NV (
) - 2.8% – Salesforce Inc. (
) - 2.6% – GlobalFoundries Inc. (
) - 2.5% – Okta Inc. (
)
(See the most recent fund information.)
AI: Driving growth but also volatility
AI continues to offer enormous growth potential for companies that lead in its use and development, Benjamin says. A leader in this space has been Nvidia, which makes the cutting-edge chips that power much of the world's AI boom. But other chip stocks may be poised to benefit from AI as well.
While Benjamin is constructive on the long-term growth opportunities presented by AI, he expects that over the shorter term, the volatility among stocks so closely tied to AI may continue. There's still uncertainty around the growth potential of future earnings for these companies, and stocks may continue to face swings as investors calibrate their expectations.
Beyond AI: Improving valuation and inventory dynamics
With all the attention grabbed by AI, Benjamin notes that developments affecting non-AI-focused semiconductor companies may be flying under the radar. In fact, some chip companies that are less closely tied to AI have underperformed the market in recent years, leading to potentially attractive valuations. Examples of this have included ON Semiconductor (
The semiconductor industry has always been cyclical. The companies tend to benefit when chip inventories are low and demand is high. Then they tend to overproduce new chips, leading to excess supply that weighs on prices. COVID created an extreme version of this cycle. The pandemic caused a severe chip shortage; then, as the world reopened, many makers of semiconductors for products like cars and cell phones rapidly ramped up production, leading to a glut. The companies' earnings outlooks suffered, leading to a selloff in their stocks.
More recently, valuations such as price-earnings (PE) ratios have been low, and the industry could be entering a more favorable supply-demand environment. "I believe some selloffs were overdone, and companies have been working through their inventory surplus," says Benjamin. "It could be an attractive cyclical setup."
The cloud: An ever-growing data warehouse
For AI to fulfill its potential, data must live in the digital cloud.
Benjamin believes that migration to the cloud is still in its early stages. Cloud providers have been aggressively investing in infrastructure, as end-user spending on public cloud services is expected to reach nearly $700 billion this year.2
Many of the leading AI chip producers are also key suppliers for this buildout.
Digitization: From cars, to wearables, to appliances
People often associate automotive semiconductors with electric vehicles. But today, even most gasoline-powered new cars are essentially rolling computers, and they require growing volumes (and values) of chips. This requirement may continue to grow as automakers introduce more driver-assistance and autonomous-driving features.
"In addition to the growth of EVs, demand for semiconductors in the auto industry has been driven by the proliferation of features such as backup cameras, screens, and driver assistance systems," Benjamin says. "I believe there may be significant opportunity for companies that produce the required technology."
Automotive applications are just one expression of the digitization of everything. In addition, companies are investing in infrastructure to support hybrid work and moving more of their operations online to meet customer expectations. Data is being exchanged by everything from wearable devices and home appliances to critical infrastructure through the Internet of Things.
The CHIPS Act: Bipartisan support for a strategic industry
The Creating Helpful Incentives to Produce Semiconductors, or CHIPS, Act was passed in August 2022, and authorized about $280 billion in new spending, with the goal of supporting domestic production of key semiconductors, including about $24 billion in tax credits for chip manufacturing.3
Although many industries may come into the crosshairs of partisan politics, Benjamin believes that the CHIPS Act is unlikely to be repealed, regardless of the outcome in November. The act was passed with bipartisan support. And semiconductors are an industry of strategic importance, with both parties sensitive to concerns that geopolitical rivals could outpace the US in this essential area.
Specific areas of potential opportunity
Taking all these factors into account, Benjamin is bullish on semiconductor companies that he believes can stand to benefit from the worldwide investment in technology infrastructure.
Companies that have illustrated the investment theses mentioned above include:
- Nvidia (
). Based in Santa Clara, California, Nvidia designs, manufactures, and sells graphics processing units, semiconductor chips, and other software. It has been a global leader in AI computing, as well as a producer of chips for autonomous vehicles, gaming, and a range of other applications. - NXP Semiconductors (
). The Dutch company's products include microcontrollers, processors, sensors, analog integrated circuits (ICs), and connectivity modules. It has been a major supplier of chips for industrial applications, automobiles, mobile phones, and public transit systems. - ON Semiconductor (
). Also known as onsemi, the Scottsdale, Arizona-based company produces sensing and intelligent power chips for a wide variety of applications, including medical devices, energy infrastructure, automobiles, mobile phones, and servers.
Says Benjamin, "We see a rare opportunity for investors to take advantage of macro forces that are collectively driving demand for semiconductors and can continue to do so."