Will 2023 be a better year for the chip sector? Wall Street pros weigh in and share their top picks

Published Mon, Dec 26 20227:15 PM EST

It's been a tough year for the once-booming semiconductor sector. In a sign of just how bearish the market has turned on it, the ProShares UltraShort Semiconductors ETF , an inverse exchange-traded fund that bets against the sector, has returned nearly 29% this year, while the PHLX Semiconductor Sector Index is down about 34% in the same period. But several Wall Street pros are urging investors to take a longer-term view on the sector, given the importance of the semiconductor chip in several key secular trends. In a note on Dec. 15, Bank of America described the current downturn as "the largest semiconductor slump since the Great Financial Crisis" — but it added that the future looks "promising." The bank said the next leg of growth for the sector will be led by government spending on renewable energy and carbon neutrality. "Investment of roughly 500 trillion Japanese yen [$3.75 trillion] in global, green-related applications is expected. Global demand at such scale has never been seen before. Growth at a rate higher than has been seen in the semiconductor industry over the past 20 years is likely," Bank of America's analysts, led by Niima Komura, wrote in the note. The investment bank added that the transition from traditional combustion-engine based vehicles to electric vehicles will boost demand for chips. JPMorgan is also positive on the sector and expects it will continue to beat the market on a multi-year basis. "Despite a cyclical downturn in 2H22 and into 2023, multi-year outperformance for the group remains intact, and we expect that trend to continue in 2023," JPMorgan's analysts, led by Harlan Sur, said on Dec. 9. JPMorgan expects the market will reward semiconductor companies that have scale, strong market leadership, as well as potential for margin and free cash flow expansion. Meanwhile, demand for chips in the cloud, datacenter, telco, enterprise, and auto sectors remain "constructive" in 2023, he added. The bank named Analog Devices , Marvell Technology , Globalfoundries and Microchip Technology among its top stock picks in the chip sector. Meanwhile, KeyBanc Capital Markets said it believes the decline in the sector has been "largely priced in" and expects a "soft landing." The firm's top picks include Advanced Micro Devices , Nvidia and Qualcomm . All are rated "overweight" by the firm. TSMC in the headlines One chip stock that has consistently been on investors' radars is semiconductor powerhouse Taiwan Semiconductor Manufacturing Company (TSMC). The current slump in the chip sector hasn't deterred Warren Buffett's Berkshire Hathaway from investing in TSMC — he built a 1.2% stake in it at the end of the third quarter, making the Taiwanese firm the conglomerate's 10th-biggest holding at the end of September. Deutsche Bank has also highlighted TSMC as a key stock to watch amid what it said is a decoupling in the broader sector. "Amid the deglobalization trend, two ecosystems will likely start to develop within semiconductors in 2023. One centered around the U.S., the other around China," Deutsche's analysts, led by Marion Laboure, wrote in the bank's "Top 10 themes for 2023" note earlier this month. China is working on a more than 1 trillion yuan ($143 billion) support package for its semiconductor industry , according to a Reuters report on Dec. 13, as it seeks to build self-sufficiency in advanced chips after the U.S. banned American companies from exporting software and equipment for advanced computing chips to China. The rivalry between the two countries will have a tremendous impact on Taiwan, which is a major node in the global semiconductor supply chain, according to Deutsche Bank. The bank noted that TSMC manufactures 54% of the world's semiconductors and 90% of the most advanced chips. "Regardless of its global importance, its physical presence is local. Nearly all its long-term assets, including its manufacturing facilities, are in Taiwan … In the case that Taiwan goes offline, everything from 5G networks to the development of the 'metaverse', to the availability of dishwashers will be impacted," she said. But some market watchers are striking a more cautious tone and are advising investors to remain on the sidelines for now. "We can't buy cyclicals — and I would put semis in this camp — until the cycle has reset and that has not happened yet, in my opinion," Liz Young, head of investment strategy at SoFi, told CNBC's "Halftime Report" on Monday. "I would wait on this a little bit. If we get another stab down in the market though that's when I would start buying semis," she added. Bryn Talkington, managing partner at Requisite Capital Management, is urging investors to be selective . The long-time shareholder in Nvidia told CNBC's "Closing Bell" on Friday that investors should pick "individual names with secular tailwinds," such as those with a focus on the auto industry. "Those are going to be the big winners in that space longer term," she said. — CNBC's Michael Bloom and Yun Li contributed to reporting