Stacy Rasgon: “Demand Is Off The Charts” in Semiconductors… And Set To Double Again Soon

Jack Farley (0:00)

This episode is brought to you by Sarmaya Partners, who manages the Return to Tangibles ETF lens, ticker L-E-N-S, the Sarmaya Thematic ETF, built for a return to tangibles. Learn more at sarmayetf.com and see the show notes for disclosures. Let's get into it. Got a very special conversation. I'm joined by Stacy Rasgon, Managing Director and Senior Analyst of US Semiconductors and Semiconductor Capital Equipment at Bernstein Research, obviously with Semiconductors Powering AI. This is an extremely important topic. Stacy is very in demand. Really appreciate you coming on, Stacy. Thank you.

Stacy Rasgon (0:33)

It's good to be here. Thank you.

Jack Farley (0:35)

Stacy, I want to start with a little conundrum we have in the market.

There's some things I'm having trouble understanding or squaring, which is that the earnings in the semiconductor sector are up about 100 percent, roughly. But the sector's earnings multiple is down, and semiconductor stocks are still well below their June highs. What does the market know or maybe fear that the numbers and the estimates aren't showing?

Stacy Rasgon (1:02)

I mean, look, semiconductors typically are a cyclical industry, and investors tend to think about that as the stocks are moving. As investors start to worry that we're getting closer to a peak, the beats on the earnings front tend to get rewarded less and less, and so you start to see the multiples come down. So that is not an atypical behavior if you're approaching a cycle peak, and I think that's what the stocks in some sense are telling you that we may be approaching. Now, that being said, it sort of begs the question, what if we're not? And I would argue that at least at this point, from an earnings standpoint, we probably aren't. And I'd also say there's a little more angst out there simply because you mentioned the stocks are down quite a bit off the June peak, although we're still up 80% year to date. If we just got in here monotonically, everybody would feel fine.

That never happens though. And clearly, if you piled into the space in the middle of June, you're still hurting. And so these are the kinds of things that sort of drive sentiment and everything else. Sentiment, I think, in general, has been a little worse because of that. That being said, when I look at things, to me, at least fundamentals still look like they're getting better, not worse. As you mentioned, earnings are up tremendously. So if the stocks are up and when I say stocks in this context, talking about the SOX index, we use that as a general proxy for the space. It's an index made up of semiconductor and semi-cap companies. It's up roughly 80 percent, maybe even a little more a year to date, and the earnings are up more than 100 percent. The multiples are down. Even since June, as the stocks are down off the peak, the forward earnings estimates since June are actually still up, and the stocks are down. So the multiples have compressed even more. But as you start to look out, at least commentary from the different companies, you have companies like Nvidia and Broadcom, who have both said they think they can grow 70 to 100 percent plus next year. Broadcom suggested they could even grow 100 percent again in 28 You listen to some of the memory companies who have suggested that supply and demand will be even tighter in 27 and 28 than they are in 26, and supply demand for memory is very, very tight in 26

You look at the general commentary from the companies out there that are actually spending the money on this, the hyperscalers and everything, and the one sort of dominating theme we're hearing from everybody is nobody has enough compute. At this point, fundamentals seem better or not worse. I'm not really worried about a cycle peak yet. I will say the same thing that I've said all along since it started. Chachibiddy showed up at the end of 22, and at some point, presumably, we'll hit a peak and you'll roll over and we'll hit an air pocket or something, but it's not yet. It's not this year. It's not that next year. It doesn't look like it's 28, 29 I don't know, right? But my guess is we've still got some room, and especially after the pullback and we're going to earnings, and it feels to me like things still have more room to run off of this base. At a minimum, these fundamentals are still getting better.

Jack Farley (4:03)

So the fundamentals are still looking solid. Your estimates are still high and raising, and the same is true of the street.