JPMorgan analysts are predicting potential gains for three European chip companies ahead of Nvidia’s upcoming results. The companies identified as having the strongest prospects for investors seeking to cash in on an upturn in the microchip market are VAT Group, ASML Holding, and ASM International.
The analysts explain that while the microchip market is showing signs of improvement overall, certain segments, particularly those supplying chips to the auto and industrial sectors, are improving more slowly than others. However, the market for memory chips is signaling a bumper recovery, with inventory levels for microchips used in computer storage devices currently lower than average seasonal levels.
This presents an opportunity for Europe-based semiconductor companies that are least exposed to the autos and industrial sectors. VAT Group, a Swiss company that makes vacuum valves used in chip manufacturing, along with Dutch firms ASML Holding and ASM International, which make lithography machines used for semiconductor production, are expected to see significant benefits in the near term.
All three European companies have experienced notable share price gains over the past year, with VAT gaining 51%, ASML 43%, and ASM 81%. Importantly, these companies focus on manufacturing equipment used for advanced microchips found in electronic products like smartphones and personal computers. JPMorgan believes this positions them advantageously to benefit from any recovery in the market.
In contrast, companies more exposed to the auto and tech industries, such as German firm Infineon Technologies AG and Swiss firm STMicroelectronics, are expected to continue trading at subdued levels despite already being cheap. The challenges in these sectors make it difficult for them to bounce back.
The analysts note that inventory levels for chips used in the auto and industrial sectors are currently 38.7% higher than three-year seasonal averages in the fourth quarter of 2023. This is a deterioration from the 31.1% rate in the third quarter of 2023. On the other hand, inventory levels for memory chips improved significantly in the same period, falling from 19% above seasonal averages in the third quarter to 1.7% below normal seasonal levels in the fourth quarter.
ASML Holding, which is currently the world’s sole manufacturer of extreme ultraviolet lithography machines used for advanced chips in the AI industry, was previously split off from ASM International in 1984 through a joint venture with Philips. ASM International continues to design the wafer processing machines used for microchips. VAT Group produces vacuum valves needed for manufacturing high-tech chips in sterile environments.
Investors are eagerly awaiting Nvidia’s 2023 results, as they are expected to provide valuable insights into the health of the global chip market. The anticipation is fueled by excitement around a possible AI-driven boom.
In conclusion, JPMorgan analysts suggest that VAT Group, ASML Holding, and ASM International are the European chip companies with the strongest prospects for investors. These companies are well-positioned to benefit from the recovery in the microchip market, particularly in the memory chip segment. On the other hand, companies more exposed to the auto and tech sectors may continue to face challenges. The upcoming results from Nvidia are highly anticipated and will provide important information about the state of the chip market.
