Chips don’t generally get a good press. It’s true. Have you heard of the saying “a chip on the shoulder”. It refers to people who often seem bitter, hold grudges, and are easily provoked into arguments.
What about “had your chips”? It means that someone’s luck has run out. They have completely failed, or that they have lost their position and power. The “chips are down” is another popular idiom. It refers to a person who is in a difficult, urgent, or desperate situation.
For a long time, chips and anything related to chips have been the toast of the stock market. Investors just couldn’t get enough of chip designers, chip makers, and producers of chip-making equipment. Consequently, chip stocks have been powering many global indices to eye-watering levels.
The likes of NVIDIA, with its market value of US$5.5 trillion, has come to dominate both the S&P500 and Nasdaq100. Meanwhile, Dutch chip-equipment maker ASML has grown to sit atop the Netherlands AEX index.
In Taiwan, the crown belongs to Taiwan Semiconductor, whilst in Korea, Samsung and SK Hynix account for around 50% of the Korean KOSPI. And now China’s latest squeeze, CXMT, is the latest talk of the town.
But valuation matters. Some analysts might claim that momentum is all that counts. But the stock market has always been about working out the yield on an asset over the lifetime of the asset. Some investors might think that it is old fashioned. But some things will never change.
Consequently, the recent pullback in chip stocks should not come as a huge surprise. If we should overpay for an asset, then no amount of dividends we earn can ever justify the investment. That is unless we can find someone to take the shares off our hands at a higher price.
That is not to say that investing in chips is ever a bad idea. The chip sector is notoriously cyclical in nature. What’s more, the emergence of AI has opened up a whole new product line for chip companies.
But valuations still matter. It is also important to appreciate the undulating nature of the chip sector. For long-term investors, timing is less of a consideration, especially if we can find a chip company that can reward its investors with dividends. If you can’t, then be prepared for a soggy-chips experience.
If you’d like to learn more investing concepts, and how to apply them to your investing needs, sign up for our free investing education newsletter, Get Smart! Click HERE to sign up now.
Get more stock updates on our Facebook page. Click here to like and follow us on Facebook.Disclosure:
David Kuo does not own any of the shares mentioned.
