Semiconductor Industry and M&A Update - Summer 2024

Semiconductors Enjoying a Strong Rebound

After experiencing a challenging year in 2023, the global semiconductor market appears on track to rebound strongly this year with 16.0 percent ⁽¹⁾ growth to $611 billion, representing an all-time high, well above $574 billion in 2022. Much of the growth is expected to be driven by processors and memory segments on the back of growing demand for AI semiconductors, notably data center processing and high bandwidth memory (HBM) chips. Propelled by its dominant position in the AI chip market, NVIDIA’s revenue is expected to surpass $120 billion, overtaking Intel and claiming the number one position after entering the top five for the first time last year.

Recent public earnings revealed mixed results, with variable outcomes driven largely by differences in end-market exposure. Leading AI chip companies like NVIDIA and AMD continue to outperform and guide to sequential growth. Away from the data center, suppliers into some markets, such as consumer, appear to have found bottom and begun to return to modest growth, while many suppliers into automotive, industrial, and wireless infrastructure continue to guide to sequential quarterly revenue declines.

PHLX Semiconductor Index (SOX) continues to outperform major indices, following very impressive returns of 65% in 2023 and a 24% gain YTD’24⁽²⁾. This is a story of haves and have-nots given the concentration of impact on SOX. As of August 1, 2024, the ten largest constituents accounted for approximately 60% of the index weight, and six of these top 10 SOX constituents have seen their share prices more than double since the beginning of last year, averaging a gain of 226.9%, with NVIDIA being the top mover with an 8.2x share price gain. Additionally, the SOX index was further propelled by the April 2024 adjustments made in the weight caps of the top five companies. Previously, the individual weight of the top five constituents by market capitalization was capped at 8% each. Under the updated methodology, the top three constituents are now capped at 12%, 10%, and 8%. Meanwhile, SOX has delivered approximately 40% expansion in valuation multiple since the beginning of 2023, with NTM EBITDA multiple growing from 17.3x to 24.2x.

Despite a globally challenging M&A landscape, semiconductor M&A activity has shown a notable uptick in transaction count from 33 to 44 transactions so far in 2024, while deal value exploded from $2.7 billion to $45.4 billion, driven primarily by two major EDA transactions – Synopsys's acquisition of Ansys for about $35 billion and Renesas' acquisition of Altium for approximately $5.9 billion. Additionally, processor, discrete, and wireless sectors saw buoyed M&A driven by AI processing and demand for high-performance capabilities. Semiconductor companies also acquired non-chip businesses to build out their solution platforms, highlighted by several notable transactions from NVIDIA and AMD already in 2024. Despite limited activity this year from private equity acquirers, interest in semiconductor and component businesses continues to mount and should result in increased activity from financial buyers, especially in stable high margin markets like medical, industrial, and aerospace & defense.

Sources:

WSTS Semiconductor Market Forecast Spring 2024

S&P Capital IQ, as of August 31, 2024

NASDAQ Global Indexes, as of August 1, 2024

Footnotes:

¹ World Semiconductors Trade Statistics (WSTS) Semiconductor Market Forecast Spring 2024

² NASDAQ Global Indexes, as of August 1, 2024