SOXQ: An Optimal Portfolio For The Cyclical Recovery

Core Viewpoint - The semiconductor sector is experiencing a cyclical downturn, but there is potential for strong earnings growth in 2025, driven by AI demand and a recovery in the broader market [2][18]. Semiconductor Sector Overview - The semiconductor industry is cyclical, with many subsectors not benefiting from the current AI-driven demand, leading to revenue contraction and stagnating share prices [2]. - The Invesco PHLX Semiconductor ETF (NASDAQ: SOXQ) is analyzed for its balance of AI-driven companies and those expected to recover in 2025, potentially driving EPS growth over 30% [2]. ETF Performance - SOXQ, a newer ETF launched in mid-2021, competes with established ETFs like SMH and SOXX, which are significantly larger in assets under management (AUM) [3]. - SOXQ has shown a better balance in stock weights compared to its competitors, despite its short history [3]. Index Methodology - SOXQ utilizes the Philadelphia Semiconductor Index, selecting 30 top US-listed companies and weighing them by market capitalization with specific limits for the top three companies [5][6]. - This methodology provides adequate diversification and concentration across the sector, with SOXQ and SOXX exhibiting similar index traits [5]. Portfolio Upside Potential - The ETF's 30 stocks have a consensus price appreciation potential of 21%, with small-cap names like Axcelis Tech and Wolfspeed showing over 50% upside potential [10]. - The average upside across the ETF's holdings is 24%, indicating high analyst expectations [10]. Revenue Growth and Net Margins - The ETF is projected to see over 18% revenue growth, driven by key players like Nvidia and Broadcom, with a solid outlook for 2025 [12]. - Approximately 30% of the companies in the ETF are expected to experience revenue declines in 2024 before rebounding in 2025 [12]. EPS Growth - The consensus EPS growth rate for the ETF portfolio is over 25% for the YE24-25 period, with significant acceleration expected in 2025 [14]. - Key contributors to this growth include Nvidia, AMD, and Intel, which are anticipated to support the sector during the downturn [14]. Valuation Metrics - SOXQ is relatively cheap with a PEG ratio of 1.2x based on consensus EPS growth, compared to higher ratios for the NASDAQ and S&P 500 [16]. - The weighted price-to-earnings (P/E) ratio for the ETF is 29x for YE24, decreasing to 21x for YE25 estimates, indicating a favorable valuation [16]. Conclusion - SOXQ is rated as a strong buy, with expectations of a cyclical recovery in the semiconductor sector and continued AI-driven demand benefiting the ETF's composition [18].