Are Semiconductor stocks really so much more volatile than other stocks?

Nick Sundich Nick Sundich, July 6, 2023

Semiconductor stocks are amongst the most important companies on the market. This is because they produce the components that enable modern technology such as computers, smartphones, and other electronic devices.

So they should be stable investments, right? In the long term they are, but not necessarily in the shorter-term.

 

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What are semiconductors?

For the sake of investors on Planet Mars, let’s recap what semiconductors are. Essentially they materials that have electrical conductivity between that of a conductor, such as copper, and an insulator, such as glass. They are most commonly composed of silicon or germanium, although other elements can be used to create them.

They act as a switch in the circuit, allowing current to flow through it when activated but blocking it off when not needed. This makes them ideal for creating transistors and diodes which control the flow of current and voltage in circuits. In addition, semiconductors can amplify signals and store information in memory chips, making them even more versatile.

As a consequence, they are common in most devices today. They have revolutionized the electronics industry by allowing for faster and smaller devices with higher performance capabilities. In fact, without them you probably wouldn’t be able to read this article.

 

Semiconductor stocks do well in the longer term but not in the shorter term

Take a look at the Philadelphia Semiconductor Index. It is up 180% in the last five years – well ahead of the S&P 500’s 61% return and the ASX 200’s 15% return over those same horizons.

It is true, however, that it has not been constant growth over that time frame.

 

Philadelphia Semiconductor Index, log scale (Source: TradingView)

 

 

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It is a similar story with many individual semiconductor stocks. Look at TSMC (NYSE:TSM) for instance – its NYSE shares are up nearly 180% in five years.

However, it has not been going in that direction every single day. And it is 25% down from all time highs reached in early 2022.

 

TSMC (NYSE:TSM) share price chart, log scale (Source: TradingView)

 

Some semiconductor stocks like Weebit Nano (ASX:WBT) have recorded even more impressive returns. Of course, not all of them have achieved growth – other small caps like 4DS Memory (ASX:4DS) and Revasum (ASX:RVS) have gone in the other direction as their execution has been nowhere near as impressive as Weebit.

So ultimately the biggest indicator of how semiconductor stocks will perform in the longer-run is individual company execution. But even good companies can be volatile in the short-term for reasons as modest as reports of increased tensions between China and the USA.

 

Why the short-term volatility though?

All investors need to bear in mind the sensitivity of the broader semiconductor industry. This industry is incredibly sensitive to short-term market conditions that can change in a matter of hours or even minutes. Since these trends and shifts are so unpredictable, investors face a great deal of uncertainty, leading to higher levels of volatility within stock prices.

Additionally, the success of semiconductor products relies heavily on technological breakthroughs and innovation, which can be highly difficult to predict. This makes the industry even riskier when it comes to investing, as there is always the potential for new technologies to revolutionize the market overnight and cause dramatic stock price changes.

All these factors make semiconductor stocks highly volatile in the shorter-term compared with other types of stocks.

But the track record of this industry in the longer term speaks for itself!

 

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