Artificial intelligence (AI) has been growing by leaps and bounds, fueling the growth of many companies, such as those that build or run the data centers housing the technology to run AI processes. Some are worrying this growth in AI is a bubble — and one that will burst one day, taking down semiconductor stocks with it.
Investors in the VanEck Semiconductor ETF (NASDAQ: SMH) may worry, too, as the ETF (and others like it) is entirely invested in semiconductor companies. Here’s a look at whether the concern is warranted.
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Opinions abound on this topic. Some see a clear bubble, noting plenty of stock prices that seem to have gotten well ahead of themselves. The stock market itself has been rising robustly for several years, too. In the seven years from 2019 to 2025, it advanced by double-digits, including an increase of nearly 18% last year. So it’s not crazy to expect a retreat one of these years, perhaps driven at least in part by AI enthusiasm.
But there’s a persuasive case that we’re not in a bubble akin to some destructive ones in the past. For one thing, the intense investment in AI infrastructure by hyperscalers is generally coming from those companies’ earnings, not borrowings.
Also, the companies, such as Microsoft and Meta Platforms, don’t seem to have steep valuations. So it’s not like they’re taking on debt and carrying steep valuations due to investor enthusiasm. In 1999, before the 2000 crash, Microsoft had a peak price-to-earnings (P/E) ratio of 66, whereas more recently it was just 26.
If you’re a shareholder, I’d stay put. If you’re thinking of buying, I’d suggest you keep thinking about it — and learn more about the ETF. It’s home to about 25 semiconductor companies, and plenty of them actually seem more undervalued than overvalued. Its top holding, Nvidia, for example, recently sported a forward-looking P/E ratio of just 24. For the second-largest holding in the ETF, Taiwan Semiconductor Manufacturing, that number is 26. Many of the fund’s holdings are appealingly priced.
They’re generally not all-in on AI, either, having other focuses, such as chips for gaming, automobiles, computers, and more. And the whole sector is cyclical in nature, so these companies will see their fortunes ebb and flow, though over the long haul they’ve been powerful performers. The VanEck Semiconductor ETF’s average annual gain over the past 15 years has been a whopping 25.8%.
