As Nvidia prepares to publish its much-anticipated full-year results this Wednesday, analysts at JPMorgan say VAT Group, ASML Holding, and ASM International all offer the strongest prospects for investors seeking to cash in on an upturn in the market for microchips.
JPMorgan analysts led by Sandeep Deshpande explained that while the slump in the microchip market is now showing signs of improvement, certain segments of the market — including those that supply chips to the auto and industrial sectors — are improving more slowly than others.
The market for memory chips is, meanwhile, giving off signals of a bumper recovery, with inventory levels for the microchips used in computer storage devices currently sitting at lower than average seasonal levels, they said in a note to clients that published Monday.
As such, those Europe-based semiconductor companies least exposed to the autos and industrial sectors, which have the highest exposure to the market for memory chips, are set to see the biggest benefits in the near term, said Deshpande and the team.
Swiss company VAT Group
VACN,
makes vacuum valves used in chip manufacturing, while Dutch firms ASML Holding
ASML,
ASML,
and ASM International
ASM,
both make the lithography machines used to manufacture semiconductors.
Shares in all three European companies are up significantly over the previous 12 months — VAT has gained 51%, ASML 43% and ASM 81%.
Notably, all three European companies are all focused on making the equipment used to manufacture the advanced microchips used in electronic products, including smartphones and personal computers. In JPMorgan’s view, this puts them in an advantageous position to benefit from any recovery.
At the same time, those companies most exposed to the auto and tech industries, including German firm Infineon Technologies AG
IFX,
and Swiss firm STMicroelectronics
STM,
are set to continue trading at subdued levels — despite already being cheap — as the market remains challenging, they caution.
Deshpande and the team noted that inventory levels for the chips used in the auto and industrial sectors currently sit at rates 38.7% higher than three-year seasonal averages in the fourth-quarter of 2023, marking a deterioration on the 31.1% rate in the third quarter of 2023.
In contrast, inventory levels for memory chips improved significantly in the final three months of 2023, having fallen from rates 19% above seasonal averages in the third quarter to rates 1.7% below normal seasonal levels at the end of the fourth quarter of last year.
For reference, ASML Holding, which was previously split off from ASM International in 1984 through a joint venture with Philips
PHIA,
is currently the world’s sole manufacturer of the extreme ultraviolet lithography machines used to make the advanced chips used in the AI industry.
ASM International continues to design the wafer processing machines used to make microchips. VAT Group produces vacuum valves that are needed to manufacture high tech chips in sterile environments to ensure they are not exposed to outside particles.
Nvidia
NVDA,
the world’s largest chip designer, will on Wednesday announce quarterly results, which investors are expected to pore over, seeking vital clues on the health of the global chip market amid much excitement around a possible AI driven boom.
Read: Nvidia’s earnings report could kill the momentum driving U.S. stocks higher, regardless of how it turns out.
