Their recent performance is intoxicating. Ditto for their not-so-recent performance. The fear of missing out is building, as these rallies are seemingly unstoppable.
But before anyone else plows into semiconductor names like Inphi (IPHI), KLA-Tencor (KLAC 1.22%), or FormFactor (FORM -0.44%) in hopes of more red-hot gains, they might want to instead take a breath, and take a step back. Presumption has exaggerated the upside for these companies, while euphoria has obscured their risk.
Investors are betting on change
The numbers are impressive. FormFactor's stock price is up 44% year to date, thanks to the past month's 24% advance. Applied Materials (AMAT -0.15%) shares have jumped 13% in price in just the past week. KLA-Tencor stock has found new life of late, up more than 15% in just the past few weeks. Lattice Semiconductor (LSCC -4.26%) stock has doubled in value since the end of 2019. Inphi shares have gained nearly 30% over the course of the past week thanks to its recent buyout offer and are now up more than 100% for the year.
The size of gains from the less-than-mainstream players within the semiconductor industry are unusual, but the general bullishness isn't. The iShares PHLX Semiconductor ETF (SOXX -0.23%) -- which holds big stakes in Qualcomm (QCOM -0.18%) and Intel (INTC 0.58%) -- recently hit a new record high, shrugging off the February/March stumble to sit at its current year-to-date stock price gain of 33%.
The driving force for the increasing pace of gains has predominantly been investor attitude toward the now officially successful bid for the U.S. presidency by former Vice President Joe Biden. Whereas President Donald Trump has been tough on trade with China and generally unsupportive of international acquisitions, investors are betting President-Elect Biden will be more accommodating toward such dealmaking.
Dealmaking is easier said than done
On the surface, it's not a bad bet. President Trump effectively blocked the merger of Qualcomm and Broadcom (AVGO 2.79%) in 2018, citing concerns that such a deal would ultimately allow China to take the global lead in mobile technologies. The President has also been disruptive of smaller deals like the purchase of U.S. software company StayNTouch by a Chinese interest, and he somewhat dictated the terms of a three-way deal between China's TikTok and U.S. companies Oracle and Walmart.
Then there's the litany of technology restrictions Trump put in place that made partnerships with Chinese entities difficult to do. Broadly speaking, the President doesn't want the country to utilize Chinese-made internet hardware. Although Biden hasn't offered specifics as to his trade relations plans for China, if nothing else, he'd be less combative and better organized than President Trump. That's a start.
Investors who think Joe Biden may (in the end) be any less tough on China than Donald Trump has been, however, may want to think again. The Wall Street Journal acknowledged in September that Biden's policy plans seem to be quite similar to Trump's, which is an idea reiterated by others.
Biden has also railed explicitly about the theft of intellectual property owned by U.S. companies, saying in September: "The problem isn't the trade deficit. The problem is they are stealing our intellectual property." He's not wrong, but effectively addressing it is easier said than done. The only certain answer is barring American companies from using Chinese technology components, and vice versa. That's a step back from semiconductor trade, though, so that's leverage Biden may or may not actually have.
The wrong approach to the premise
Could Biden thread the needle and find a way to protect American intellectual property interests, restore healthy technology trade, and give the green light to cross-border acquisitions? Sure. Anything's possible. Not anything is likely, though, and the longer those deals don't take shape, the more prone the recent high-flyers are to pullbacks. Lattice Semiconductor looks particularly vulnerable, though it's hardly alone in being overextended.
Some of the hottest Nasdaq semiconductor stocks of late may also be up primarily on speculation of buyouts like the recent Inphi acquisition, rather than the prospect of restored trade relations.
If anything, investors looking to make a bet on new life for the semiconductor industry under a Democrat-led administration may instead be better off with a broader stake in the industry's bigger companies. These companies are better positioned to do meaningful deals than smaller peers anyway. This makes a holding like the iShares PHLX Semiconductor ETF the smarter play here.