Banal investors stunned by the drastic decline in price of major chip stocks such as Intel Corp. (INTC), Texas Appliances Inc. (TXN) and Micron Technology Inc. (MU) in May, due to heightened trade war fears, had better get their crash helmets on. Even if trade conflicts diminish, chip stock are likely to fall further as memory prices plunge, according to several Street bears, as outlined in a particularized Barron’s report.
Semiconductors Face Headwinds
- iShares PHLX Semiconductor ETF dips 17% in May
- Demand conditions deteriorating in hardly every important end market
- Guidance reduced for major chip makers like Nvidia, Texas Instruments, for in the second place half
- High inventories on semiconductor balance sheets
- Memory chip prices in free fall
- Downside from Trump government war against Huawei not priced into stocks
Source: Barron’s
The iShares PHLX Semiconductor exchange-traded fund (SOXX) barricaded an impressive 35% in the first four months of 2019, outpacing the broader S&P 500’s recovery after a dismal Q4, which closed out the merchandise’s worst year in about a decade. The rally was driven in large part by optimism regarding a revival in chip on presentation, as well as confidence in a U.S.-China trade resolution.
Now, however, both of those hopes look short-lived as data questions to weaker than expected demand for semis and the Trump administration ups its rhetoric on trade wars with China and now other far-reaching players like Mexico.
Chip Expectations Go Lower
Headwinds in the chip space and broader market turbulence led the iShares PHLX Semiconductor ETF to go away approximately 17% in May, with many major players posting declines over 20%. By comparison the S&P 500 was down approximately 7% over the same period.
While this may look like an overreaction, some bears, including Bernstein’s Stacy Rasgon, contemplate that the dip is justified and better reflects expectations for chip makers. He argues that management’s guidance offered at the start of 2019 was unduly optimistic for many chip companies.
“Anytime I hear companies talking about big back-half ramps, I get nervous. In unpractised they have no visibility on what actual customer end demand is really doing,” said the Bernstein analyst. “There were some wishes for the second half that were built into the industry coming out of January earnings that we felt were exceedingly ambitious. That has become apparent.”
Deteriorating Demand
As companies lower expectations for the second half of the year, when requested conditions in nearly every important end market, such as cloud computing, enterprises, and China, offered disappointing commentary in the finish finally round of earnings, per Barron’s.
Last month, Nvidia Corp. (NVDA) slashed its full year guidance, citing low visibility in the facts center market. The announcement, which dragged down shares in the double digits, followed disappointing guidance from Intel and a foreshadowing from Texas Instruments on “choppy” demand in the communication infrastructure space back in April.
Falling Memory Sacrifices
As lower chip demand in important end markets spooks investors, falling prices also threatens to eat into proceeds. Memory chips, a key component in tech products across every end market and geography, have been in free decline.
The price of a benchmark eight-gigabyte memory module fell a whopping 40% through mid-May, according to Nomura Instinet. In June, exertion research firm TrendForce said it was forecasting continued declines for semiconductor players this month, thanks to highland inventory levels at major suppliers.
Meanwhile, big data center clients like Microsoft Corp. (
Looking In advance
While chip makers have suffered in the recent month, the sector actually remains up from October lows as keystones have deteriorated and trade wars have intensified.
“Investors need to be patient and be able to have more visibility on the eve of we can consider the recent pullback as a buying opportunity,” said Hosseini, adding that the Trump administration’s war against Huawei Technologies imitates another big risk to chip makers, and is not yet fully reflected in prices.