Chip Stock Valuations Becoming Frothy

Valuations for chip stocks are approaching levels in 2021 when the Nasdaq 100 Stock Index ($IUXX) (QQQ) soared to a record high.  Likewise, after climbing +28% so far this year, the Philadelphia Semiconductor Index ($SOX) is trading at a price-to-projected earnings ratio that’s approaching peak levels from two years ago, when the pandemic fueled a surge in demand for everything from personal computers to televisions that chipmakers couldn’t keep up with.

Chip stocks tumbled last year as weak demand boosted chip inventories.  However, chip stocks are climbing this year, hoping for a recovery as signs emerge that companies are working through excess inventory and seeing improved demand.  However, with the global economy expected to slow due to the aggressive rate-hike campaign from the world’s central banks, chip demand may not increase enough to clear excess chip inventories.  Wedbush Securities said they struggle to explain why the stocks have rallied so much, saying,” The semiconductor recovery is getting shallower and later.”