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The PHLX Semiconductor Index
SOX,
which hit a record high of 4,039.51 on Dec. 27, fell 13% over the first quarter of 2022, and as of Monday, is down about 24% year to date, putting it firmly in bear market territory. On Friday, the SOX index closed at 2,989.83, the first time it closed below 3,000 since May 19 of last year, as previously hot stocks like Nvidia Corp.
NVDA,
and Advanced Micro Devices Inc.
AMD,
have fallen more than 30% in 2022.
That type of selloff would normally signal a buying opportunity in chip stocks, especially since most analysts are expecting another record-breaking beat-and-raise quarter from the sector. That is not what Wall Street analysts are saying, however.
The basic fear is that semiconductor companies are set up for a replay of 2018, when the chip sector entered the year on fire across the board, with stocks at record highs and increasing chip prices driving record sales. That led customers to double- and triple-buy chips before prices got even higher, leading to a glut when demand ground to a halt and saddling chip makers with inventory that took several quarters to unload as their stocks sank.
Evercore ISI analyst C.J. Muse recently wrote that investors are waiting for chip executives to predict that supply is going to overtake demand and cut their forecasts. That makes the short-term outlook murky or worse, he wrote.
“From an investment perspective, semiconductor stocks are almost uninvestable today,” Muse wrote in a recent note. “Investors want to buy the ‘cut,’ but that ‘cut’ may not happen until 2H22 at the earliest.”
“So we are left guessing whether near-term fundamentals matter (they didn’t for Micron) or whether the market will continue to wait for the coming inventory correction,” Muse said. Micron Technology Inc.
MU,
shares have dropped more than 15% since the end of March, when the memory-chip maker reported strong sales led by data-center demand.
“Our sense is violent swings will be the new norm (both up and down) until we gain line of sight to whether we will see a soft or hard landing,” Muse said.
Read: The pandemic PC boom is over, but its legacy will live on
Raymond James analyst Chris Caso also sees the potential for another 2018 in the current moment, with no sight of the end of the shortage as customers continue to order, but potential for oversupply on the other side.
“Our main concern is that the tight supply conditions and long lead times will disrupt the demand signals from the market, making it difficult for the semi supply chain to adjust production forecasts and capacity plans if and when demand changes,” Caso said in a recent note.
There are “three ingredients to a cyclical downturn: inventory, excess capacity and a demand slowdown. We have at least one — inventory,” Caso said.
“We don’t think there’s excess capacity now,” Caso said. “But capacity is being added, and could create a problem down the road. Our main concern is that the current shortages create a strong incentive to build excess inventory and capacity until customers are certain that they don’t need the product.”
Even as manufacturers complain that they could make and sell more things if only they had the microchips needed to finish those products, all chips are not created equal. If a manufacturer has a cutting-edge CPU that goes into a product but can’t get the $1 microprocessor that is also needed to finish it, then chip inventories become uneven.
That dynamic hasn’t mattered much as consumer demand for the finished product has remained high, but that may not be the case anymore, especially for personal computers. A downturn in PC sales is now happening, after consumers and businesses stocked up on new computers during the first two years of the COVID-19 pandemic and may not need to buy more.
For more: The pandemic PC boom is over, but its legacy will live on
The confusing semiconductor-sector setup will be tested this week, with a slew of after-the-closing-bell earnings reports scheduled. Texas Instruments Inc.
TXN,
reports on Tuesday, Qualcomm Inc.
QCOM,
on Wednesday, and Intel Corp.
INTC,
on Thursday, an assortment that should provide a good survey of the chip landscape — Texas Instruments is known for their analog chips, Qualcomm for their mobile device chips, and Intel for CPUs.
Two companies to watch for signals about PCs and the rest of the market are Texas Instruments and Intel, Citi Research analyst Christopher Danley wrote in a recent note.
“We expect consensus estimates to go up again during 1Q22 earnings season given extended lead times and higher pricing,” Danley said. “While we believe the upturn is in the late innings, we remain positive on the group until we see lead times decline.”
“Our main concerns are the impending PC downturn and a shift in investor sentiment to a more negative bias which could make it difficult for stocks to reach new highs until a correction,” Danley said. “We believe the likelihood of a PC slowdown in 2H22 is increasing and would be negative for the group as PCs are roughly 30% of semi demand. We expect below-seasonal guidance for Intel and Texas Instruments.”
Jefferies analyst Mark Lipacis went as far to say that Texas Instruments “is having a lot of trouble delivering enough parts as desperate customers pay $200 for a $1-2 part,” but that inventories are “not an issue yet” as they “are accumulating as OEMs are unable to complete manufacturing kits and build finished goods.”
Texas Instruments might fare better, according to a recent note from B. of A. Securities analyst Vivek Arya. Arya said that while PC weakness is probably already baked into stock like Intel and AMD, widespread shortages “especially in autos end market” and lean inventory in the types of chips made by Texas Instruments, ON Semiconductor Corp.
ON,
NXP Semiconductors NV
NXPI,
and Microchip Technology Inc.
MCHP,
are “likely to keep demand outlook solid.”
Arya said that trend was exemplified by Analog Devices Inc.
ADI,
raising its outlook earlier in the month.
One company building up that capacity is Taiwan Semiconductor Manufacturing Co.
TSM,
which reported back on April 14, topping Street expectations as the third-party fab seeks to clear backlog from chip makers hoping to fulfill high demand.
U.S. shares of ASML Holding NV
ASML,
closed nearly 2% higher last week despite an earnings miss after the chip-equipment supplier’s CEO Peter Wennink told analysts the company was “running at maximum capacity” and that it expected “demand to exceed supply well into next year.” Shares of Lam Research Corp.
LRCX,
also moved nearly 2% higher last week as it blamed its lower-than-expected results and outlook on continued supply-chain problems that had worsened in late December amid high demand. Smaller U.S. rival KLA Corp.
KLAC,
is scheduled to report April 28.
Supply-chain problems in the electronics industry have also become as pandemic as COVID-19, which is still triggering lockdowns in China, further exacerbating problems. For instance, network equipment and router company Netgear Inc.
NTGR,
recently warned its results would come in lower than expected, directly citing lockdowns in China that have worsened already difficult supply-chain problems.
Other chip-sector earnings scheduled include AMD on May 3, GlobalFoundries Inc.
GFS,
— a third-party foundry that went public in October at $47 a share — on May 10, Nvidia is expected to report May 25, and Broadcom Inc.
AVGO,
is expected to report around June 9.
“Perspective remains paramount, as we still expect broad beat/raises and while yes, most companies’ share prices are down sharply YTD, most names in our coverage universe are also coming off all-time highs ending last year,” Cowen analyst Matthew Ramsay told investors.
The weakness in chip stocks has been building to the 24% drop seen so far this year; this time last quarter, the sector was already teetering on falling into a bear market. In comparison, the S&P 500 index
SPX,
declined 5% over the first quarter, and is down 11% in 2022, while the tech-heavy Nasdaq Composite Index
COMP,
fell 9.1% in the first quarter and is off 18% year to date.
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