META: Specifically for Metaverse Exposure but Not Yet Convincing

After Mark Zuckerberg renamed Facebook to Meta Platforms (FB), the metaverse has suddenly become a hot topic with search interest on Google Trends peaking at a value of 100, signifying immense popularity. However, there is currently no universally accepted definition of the metaverse apart from some key words like “virtual reality”, or “advanced Internet”. Learning from Blockchain’s world where there are already metaverse projects like Sandbox where land can be exchanged against payments of millions of dollars, it could be defined as a virtual universe with a functional economy.

Of course, this definition is not straightforward and to be frank, no one knows exactly what shape the metaverse will take. But, for investors willing to invest hard-earned money in ETFs like the Roundhill Ball Metaverse ETF (META), it is important to understand which sectors are most likely to benefit. Some use cases are already being proposed such as attending a virtual concert, taking an online trip or creating digital art in the form of blockchain-powered NFTs or Nun Fungible Tokens.

Now, these applications will require a lot of computing power due to increased utilization of artificial intelligence and augmented reality (“AR”). At the same time, for communication purposes, there will be requirement for next generation Wi-Fi and 5G. Roundhill Investments does list some sectors like Compute, Networking, Virtual platforms, Interchange standards, etc from where they choose companies to be included in their fund, but for illustration purposes, I provide a chart which I recently used it in an article on VanEck Semiconductor ETF (SMH).

Description: https://responsive.fxempire.com/v7/_fxempire_/2021/12/word-image-274.png?func=cover&q=70&width=436

Source: Chart prepared by author using data from IEEE Spectrum and augmented to highlight metaverse demand

This chart basically shows semiconductor revenues per sector (with most coming from computing at 34.5%), but, since I have highlighted the technologies needed to build the metaverse, I use it to explore how META’s holdings fit the “meta” investment rationale.

The META rationale

First, META tracks the Ball Metaverse Index, the first index designed to track the performance of the metaverse.

Second, the ETF’s main holding is NVDIA (NVDA) at 8.34% of total assets, also happens to constitute a significant chunk of SMH’s basket. Now, as a designer of graphics processing units for the gaming and Bitcoin markets, this chip play whose products are vital for computing should be one of the main beneficiaries as a building block for everyone’s “virtual space”. Additionally, NVDIA is a system-on-a-chip unit’s provider for the mobile computing and the automotive industry.

Third, there is FB itself, and with more than 2.9 billion users as at the third quarter of 2021, and its success as a highly addictive social networking brand, there is no doubt that it will profoundly change our lives by rendering more virtual than ever, helped by a Covid-induced restriction in physical interactions.

https://static.seekingalpha.com/uploads/2021/12/26/49663886-16405745860315373.png

Source: RoundHill Investments

As for software plays like Microsoft (MSFT), Autodesk (ADSK), Unity Software (U), the metaverse is already proving to be a game-changer for working from home due to Covid. Continuing along the same thought process, instead of seeing their colleagues on a video call screen, employees could join them in a virtual office. Here, one of the main benefits of the metaverse is believed to be “presence,” meaning the feeling of physically engaging places and characters instead of looking at them through a laptop or smartphone screen.

Coming to Apple (AAPL), it has one of the world’s largest AR platforms with hundreds of millions of AR‑enabled devices, as well as thousands of related apps on the App Store. Now, one of the essential building blocks of the metaverse is interoperability whereby users must be able to move throughout the metaverse, while effortlessly make the transition to the physical world. For this purpose, they need AR devices which are supported by Apple’s iPhones. There is also an analyst forecasting that Apple’s “mixed reality headset will come out in the late 2022 or early 2023”, with the Apple Glasses to follow in 2025.

Apple should also benefit through its gaming division just like Roblox (RBLX), an online game platform which allows users to play games created by other users. In a metaverse scenario, one can envisage players retaining their avatar while hopping from one game to another or even a virtual shop for purchasing purposes, regardless of the brand of the user’s device.

After painting an enthralling picture of META, I now address some pain points.

META’s shortcomings

Since the concept of metaverse is relatively new, there will be many use cases that will arise in the future, but the space is also likely to be under intense regulatory scrutiny as lawmakers become wary of the power of big techs at extending their control on our social lives to a further degree through virtual reality. Governments may for example restrict the number of hours we can spend in the metaverse just like China is restraining the number of hours children can play games. Furthermore, Apple with its IOS operating system is only a part of the global smartphone ecosystem and it will have to be a metaverse which also encapsulates the Android operating system by Google (GOOG) with its brand of AR. META certainly includes the Android play, but only at a paltry 1.71% of holdings.

Pursuing further, META does include pioneers in content, commerce, and social for the metaverse, such as Sea (SE), Amazon (AMZN) and Snap (SNAP), and I also noted that it includes web infrastructure companies like CloudFlare (NET). On the other hand, I noted the absence of wireless plays from its portfolio. Also, the fund managers do not mention Industrial 4.0 applications, namely 3D printing which is crucial to allow transition from the virtual to the physical world.

Looking for further support from the share performance side, despite all these hot talks about the metaverse and META having already crossed the $900 million in total assets under management within six months, it managed to produce a meager 2.59% gain during this time. This is dwarfed by SMH or even the Technology Select SPDR ETF (XLK), with both these two funds producing above 17% gains in the same time period.

https://static.seekingalpha.com/uploads/2021/12/26/49663886-16405745860053453.png

Source: tradingview.com

This calls for a dose of realism.

Conclusion

There is no doubt that META is an innovative ETF with its index consisting of a tiered weight portfolio of globally-listed companies who are actively involved in the metaverse, but this whole concept is still new and rapidly evolving. I also like the fact that Roundhill Investments have also included companies like Block (SQ) and Electronics Art (EA), thus showing their perfect understanding of the Blockchain side of things.

Still, I am not convinced as to the percentage of asset held for each stock. Now, as an actively managed fund charging 0.75% in fees, the portfolio is likely to see rapid changes, but at this stage, it is preferable to wait. Finally, those who want early metaverse exposure, both SMH and XLK can be considered as proxy ETFs for this purpose, and come at lower expense ratios of 0.35% and 0.12% respectively.

Disclosure: I am long XLK.

SMH: Portfolio Rebalancing Is a Positive to Navigate Uncertainty While Metaverse Demand Materializes

The reason is simply that required technologies, be it augmented reality (“AR”), AI, 5G, or blockchain, all require the utilization of semiconductors. The pie chart below shows the relative revenue per sector, with Computing and Wireless with a combined portion of more than 60% seen as the main beneficiaries of metaverse-related investments.

Source: Chart prepared by author to highlight metaverse demand using data from IEEE Spectrum

For this purpose, the VanEck Semiconductor ETF (NASDAQ:SMH) provides exposure to a portfolio of semiconductor stocks ranging from the equipment makers like Applied Materials (NASDAQ:AMAT) to designers of graphics processing units like NVIDIA (NASDAQ: NVDA) who are fabless, or without foundries where the chip are manufactured. It also includes the world’s largest producer, Taiwan Semiconductor Manufacturing (TSM), which, according to the Wall Street Journal planned to raise prices by 10% to 20% back in August depending on the type of chips.

This is due to the supply crunch not only implying that chips have become unavailable, but more expensive too. The increases, expected to be applied towards the end of the year or from 2022 will also impact large customers, marking the end of discounts applied on big orders. The Taiwanese company also revealed that it faced a steep rise in the cost of raw materials and has to incur a three-year $100 billion investment plan aimed at increasing production in view of current shortages and developing chips.

Now, a change in the costs of raw materials in an industry already impacted by supply imbalance can have unforeseen effects on the price of finished goods, in the form of everything from consumer electronics, smartphones, Bitcoin mining equipment, cars, etc. Added to these are inflationary concerns not auguring well for next year. It is precisely here that portfolio rebalancing as effected by VanEck, SMH’s fund manager becomes handy.

In this case, with 25 holdings, SMH is an actively managed fund carrying an expense ratio of 0.35% and tracking the performance of the MVIS US Listed Semiconductor 25 Index (MVSMHTR), which provides exposure to semiconductor production and equipment. As for the rebalancing act, I noticed a crucial change between the holdings as of July 31 and December this year. The changes pertain to the percentage of assets for TSMC which has been reduced from 13.62% as shown in the table to the left to 9.89% (right-side table). This constitutes a significant reduction and is not only appropriate in an environment characterized by increasing geopolitical tensions between the U.S. and China but also to navigate short-term turbulence in the industry.

https://static.seekingalpha.com/uploads/2021/12/23/49663886-1640312564473821.png

Source: Tables built with data from vaneck.com

Conversely, this reduction in TSMC’s assets has resulted in the portfolio being relatively more exposed to NVidia, thereby benefiting SMH’s price performance from the end of October (blue chart below). Now, whether its GPU-based computing power is produced for gaming or for crypto mining, the company should benefit from more sales in 2022, as long as it is able to source raw materials in a profitable way. Still, in the event that it is not able to do so, SMH as an ETF provides for investment diversification by encapsulating other plays in the chip ecosystem.

Another key player, Advanced Micro Devices (NASDAQ:AMD) could lessen chip supply woes by outsourcing some production to other foundries like Samsung Electronics (OTCPK:SSNLF), which is investing heavily in its foundry business in a bid to win more clients. Here, I also like VanEck cautiously increasing exposure to Intel (NASDAQ:INTC), from 4.66% to 5.14%, in light of the latter investing $20 billion to set up two plants in Arizona.

Description: https://static.seekingalpha.com/uploads/2021/12/23/49663886-164027899237196.png

Source: Table prepared by author from data in finance.yahoo.com

Furthermore, as seen by the dotted blue line, the VanEck’s fund is on an upwards trajectory and should reasonably cross the $325 level in the first quarter of 2022, with this forecast supported by data from the Worldwide Semiconductor Trading Statistics which predicts that the market is expected to increase by 25.6% in 2021, and continue to grow by 8.8% in 2022. This prediction does not take into consideration chip requirements to build augmented reality around Facebook’s social media platform, Microsoft’s (NASDAQ:MSFT) work-oriented “metaspaces”, and blockchain-powered metaverses like Decentraland, which require enormous computing power for millions of digital coins to be mined (produced) and where virtual plots of land are priced at millions of dollars.

Pursuing on a cautionary note, investors should beware of short term volatility, especially in the first week of January 2022 when the Semiconductor Industry Association (“SIA”) which represents a large chunk of the U.S and foreign chip firms covering all regions of the world will reveal sales figures for the month of November 2021. In this case, any global or even major regional shortcomings may cause a dip in SMH’s, in contrast to the more than 5% surge on December 6, when the SIA announced upbeat news for the month of October.

Finally, with fewer holdings compared to the SPDR S&P Semiconductor ETF (XSD) but bearing the same expense ratio, SMH carries more concentration risks, but, despite all the volatility grappling the stock market in 2021, it has outperformed its peer by 2.38% during the last year. Consequently, looking forward to 2022, with a higher dose of market volatility to be potentially induced by factors like more intensive “metatalks”, geopolitics, Omicron spread, and regulatory scrutiny impacting cryptocurrency like Bitcoin, SMH is a better choice for the longer term.

 

Big Money Locks in on Keysight

And the provider of networking and testing equipment could rise even more due to the broad range of industries it serves and strong earnings. But another likely reason is Big Money lifting the stock.

So, what’s Big Money? Said simply, that’s when a stock goes up in price alongside chunky volumes. It’s indicative of institutions betting on the shares.

Smart money managers are always looking for the next hot stock. And Keysight has many fundamental qualities that are attractive.

This sets up well for the stock going forward. But how the shares have been trading points to more upside. As I’ll show you, the Big Money has been consistent in the shares all year.

You see, fund managers are always looking to bet on the next outlier stocks…the best in class. They spend countless hours sizing up companies, reading reports, speaking to analysts…you name it. When they find a company firing on all cylinders, they pounce in a big way.

That’s why I’ve learned how critical it is to gauge Big Money demand for shares. To show you what I mean, have a look at all the Big Money signals KEYS has made the last year.

The last few weeks have seen Big Money activity, too. Each green bar signals big trading volumes as the stock ramped in price:

Source: www.mapsignals.com

In 2021, the stock has attracted 25 Big Money buy signals. Generally speaking, recent green bars could mean more upside is ahead.

Now, let’s check out technical action grabbing my attention:

Outperformance is important for leading stocks.

Next, it’s a good idea to check under the hood. Meaning, I want to make sure the fundamental story is strong too. As you can see, Keysight has been growing sales and earnings at a double-digit rate. Take a look:

  • 1-year sales growth rate (+17.1%)
  • 3-year earnings growth rate (+106.7%)

Source: FactSet

Marrying great fundamentals with technically superior stocks is a winning recipe over the long-term.

In fact, KEYS has been a top-rated stock at my research firm, MAPsignals, for years. That means the stock has buy pressure, strong technicals, and growing fundamentals. We have a ranking process that showcases stocks like this on a weekly basis.

KEYS has a lot of qualities that are attracting Big Money. And since 2015, it’s made this list 27 times, with its first appearance on 1/15/2019… and gaining 183.49% since. The blue bars below show the times that Keysight was a top pick since 2015:

Source: www.mapsignals.com

It’s been a top stock in the technology sector according to the MAPsignals process. I wouldn’t be surprised if KEYS makes additional appearances in the years to come. Let’s tie this all together.

The Bottom Line

The Keysight rally could have further to go. Big Money buying in the shares is signaling to take notice. Shares could be positioned for further upside. Given the historical gains in share price and strong fundamentals, this stock could be worth a spot in a growth-oriented portfolio.

Disclosure: the author holds no positions in KEYS in personal or managed accounts at the time of publication.

Learn more about the MAPsignals process here.

Disclaimer

https://mapsignals.com/contact/

 

The VanEck Semiconductor ETF (SMH) Could Top $350 by Year-End

The VanEck Semiconductor ETF (SMH) has surged by more than 37% since the start of the year and could reach the $350 mark before the end of 2021.

SMH is a Good Semiconductor ETF

The VanEck Semiconductor ETF (SMH) is a fund sponsored by VanEck and has more than $7 billion in assets under management. Thus, making it one of the largest funds seeking to match the performance of the Technology – Semiconductors segment of the stock market.

The SMH ETF is designed to match the performance, before fees and expenses, of the MVIS US Listed Semiconductor 25 Index. Meanwhile, the MVIS US Listed Semiconductor 25 Index tracks the general performance of companies operating within the semiconductor equipment and production space.

SMH currently has an operating cost of 0.35%, making it one of the cheapest investment products in this space. The fund’s 12-moth trailing dividend yield is 0.50%, and it holds most of its assets in Taiwan Semiconductor Manufacturing Co (14.16% of the total assets). The two other major assets are the Nvidia Corp (NVDA) and Asml Holding Nv (ASML).

SMH Could Rally Higher

The SMH ETF is one of the best-performing funds in the semiconductor space. Since the start of the year, the fund has gained about 37.80%, and its value has surged by 57.19% over the past 52 weeks. Over the past year, SMH has traded between $188.82 and $302.94.

SMH ETF chart. Source: FXEMPIRE

At the time of writing, SMH is trading at $302.03, up by more than 0.03% since the United States market opened a few hours ago. The ETF’s price could touch the $350 level over the coming weeks if the fund can maintain its excellent performance.

The SMH ETF has a beta of 1.16, while its standard deviation of 34.61% for the trailing three-year period makes it a high-risk fund in the semiconductor space. The fund currently holds 26 stocks in its portfolio, making it more concentrated than other ETFs in the semiconductor sector.