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The semiconductor sector has been at the forefront of the rally in the broader technology industry, driven by generative artificial intelligence (AI). Year-to-date, the Philadelphia Semiconductor Index has risen over 15%, while the MSCI All Country World IT index is up 10.1%. Since late October, these two indices gained 51% and 31%, respectively.
But despite this strong upturn, UBS strategists believe the outperformance of global semiconductors stands to continue, citing “faster revenue growth, higher operating margins, and stronger balance sheets.”
UBS noted that global chip stocks continue to benefit from sustained AI demand, especially as big tech companies increased their capital expenditure (capex) significantly during the first-quarter earnings season.
“We believe the bulk of the capex increase will go to AI computing, and therefore expect global semis to see earnings growth of 50% this year and 25% in 2025,” strategists said.
“This compares with our estimates for global tech earnings growth of 20% and 16% this year and next, respectively. In our view, strong demand for high performance computing led by AI and cloud should offset mixed end-demand for other segments like smartphones and PCs,” they added.
Against this backdrop, operating margins among semiconductor companies are also improving.
The software industry has historically led in operating margins (around 35%) within the global tech space, followed by semiconductors at 25–30%. However, UBS strategists estimate that strong pricing power and operating efficiencies will raise global semiconductor operating margins to around 35% this year and 37.5% in 2025.
Moreover, high capex intensity has historically meant weaker balance sheets for semiconductor companies. But with capex discipline and strong pricing power, their balance sheets are improving.
UBS strategists project free cash flow margins to increase from 15% in 2023 to 22% this year and 26% in 2025, which should lead to increased cash distributions and investments in the start-up ecosystem.
“So, with the industry still trading at around a 10% discount to the broader tech sector, we continue to see a favorable risk-reward for global semis names,” strategists noted.
“Coupled with tactical opportunities in memory, we view semiconductors as one of our preferred ways to ride the AI wave. We like industry leaders in logic, foundries, and semicap equipment,” they continued.
