Why Investors Should Minimize Exposure To Semiconductors The Daily Financial Trends

Citi Analyst Chris Danely is warning investors to stay away from semiconductor stocks.

In a new note to clients, Danely writes, “We believe negative catalysts will now outnumber positive catalysts given upcoming PC data points and monthly Taiwan sales figures. We also expect negative data points in September in broader semis as the correction continues.”

His top pick in the sector is still Analog Devices, however he has now reversed his short term bullish ratings for chip makers NXP Semiconductor and ON Semiconductor.

He continued, “We continue to believe we are entering the worst semiconductor downturn in at least a decade, and possibly since 2001 given the expectation of a recession and inventory build. We expect every company in our coverage universe and every end market to experience a correction.”

Danely has very good reason for his cautious outlook on the sector. Chip stocks thrived in the pandemic. Consumers generously spent copious stimulus money to upgrade all of their devices so they could most effectively work from home and take virtual schooling.

However now the latest data shows sharp declines in discretionary spending as inflation saps consumer’s pocket books. At the same time that consumers are putting off big ticket discretionary purchases, consumers see less need to purchase or upgrade their brand new, latest generation, pandemic-bought devices. And as everyone returns to work and school after the pandemic, they have less need for the devices as well.

Already you are beginning to see this in the performance of chipmakers’ stocks.

Here is a look at four chipmakers, and how their stocks are trending.

For five years, Nvidia has only known rapid growth. However all of that appears to have hit a wall in the second quarter. This week the company issued shocking sales and profit warnings, downgrading Q2 sales guidance from $8.10 billion to $6.7 billion and margin guidance from 67.1% to 46.1%. Similarly the stock is down 38% so far this year.

In a new SEC filing, Nvidia said, “The shortfall relative to the May revenue outlook of $8.10 billion was primarily attributable to lower sell-in of Gaming products reflecting a reduction in channel partner sales likely due to macroeconomic headwinds. In addition to reducing sell-in, the company implemented pricing programs with channel partners to reflect challenging market conditions that are expected to persist into the third quarter.”

Micron updated its Q4 sales guidance from $7.2 billion plus or minus $440 million to $6.8 billion or less, as its stock has declined 34% year to date.

In its SEC filing, Micron noted, “Recently, due to macroeconomic factors and supply chain constraints, we have seen a broadening of customer inventory adjustments. As a result, our expectations for CY22 industry bit demand growth for DRAM and NAND have declined since our June 30, 2022 earnings call, and we expect a challenging market environment in FQ4 22 and FQ1 23.”

AMD has not fallen as short on guidance, but AMD CEO Dr. Lisa Su has noted in an earnings call, “We have taken a more conservative outlook on the PC business. So a quarter ago, we would have thought that the PC business would be down, let’s call it high-single digits [percentage points]. And our current view of the PC business is that it will be down, let’s call it mid-teens [percentage points].”

AMD has predicted a worse than expected third quarter even though it predicts continuing strong demand in sales of chips for data centers. So far this year AMD is down 31%.

Intel has downgraded its full year sales guidance from $76 billion to $65-68 billion, and similarly downgraded EPS guidance from $3.60 to $2.30 after missing second quarter earnings estimates. So far its stock is down 32% for the year.

Intel has indicated it now expects the market for PCs will plunge 10% this year, due to consumers who upgraded during the pandemic seeing no need to buy new machines. However the company hopes demand may pick up later in the year.

Intel CEO Pat Gelsinger said in an interview, “We believe that we are at the bottom. We have said that very plainly, that we are below the shipping rates of our customers. So we see that building back naturally. Also as we go into the second half you have some of the natural cycles like holidays as well. So all of those give us confidence in the guidance we gave.”

And all of this is even before considering China is conducting extensive military drills around Taiwan which the island nation says are preparations for an invasion of its shores followed by forced reunification. And that is coming on the heels of China threatening “military action” if House Speaker Nancy Pelosi followed through on her now-concluded visit to the island.

Presently Taiwan-based TSMC manufactures 92% of the most advanced sub-10nm semiconductor chips used by the world, and sold by companies such as those discussed above. The US does not manufacture any sub 10nm chips domestically. And there have been persistent rumors that Taiwan, in a mutual agreement with the United States government, has rigged all domestic semiconductor manufacturing facilities to self-destruct and slag their equipment, in the event of an invasion by China. That would prevent China from gaining the most sophisticated chip-manufacturing technologies of makers such as TSMC, which are viewed as a mixture of vital national security secrets and capabilities.

Any sudden disruption of Taiwan’s ability to produce semiconductor chips, combined with some sort of retaliatory global sanctions regime applied to China for invading the island nation, would be catastrophic for the entire sector.

The entire industry could be one surprise move by China away from years of disruption, before US chip factories came online, and other manufacturers in South Korea, Japan, and Europe were able to ramp up production to try and meet the demand currently being satisfied by TSMC.

And as we have seen the semiconductor industry affect considerably more than just computers and personal electronic devices. Everything from washing machines to automobiles are dependent on semiconductors. In turn each of those industries generates the very jobs which pay for everything bought in the economy.

The limits of the economic effects of such an event as a Chinese invasion of Taiwan are likely barely imaginable.

The Daily Financial Trends

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About Stu Turley 2009 Articles
Stuart Turley is President and CEO of Sandstone Group, a top energy data, and finance consultancy working with companies all throughout the energy value chain. Sandstone helps both small and large-cap energy companies to develop customized applications and manage data workflows/integration throughout the entire business. With experience in implementing enterprise networks, supercomputers, and cellular tower solutions, Sandstone has become a trusted source and advisor in this space. Stuart has led the “Total Corporate Digital Integration” platform at Sandstone and works with Sandstone clients to help integrate all aspects of modern digital business. He is also the Executive Publisher of www.energynewsbeat.com, the best source for 24/7 energy news coverage and is the Co-Host of the energy news video and Podcast Energy News Beat. Stuart is on Board Member of ASN Productions, DI Communities Stuart is guided by over 30 years of business management experience, having successfully built and help sell multiple small and medium businesses while consulting for numerous Fortune 500 companies. He holds a B.A in Business Administration from Oklahoma State and an MBA from Oklahoma City University.