Taking stock on the decline of semiconductor stocks

Jay Goldberg

Posts: 23   +0
Staff

The stock market has apparently fallen out of love with semiconductor stocks. Most major semis stocks are down this year, some by half. The SOX Semis index is down almost 18% this year. We are not in the markets on a daily basis anymore, but as the Street progresses through earnings season, we thought we would take stock on stocks.

Editor's Note:
Guest author Jonathan Goldberg is the founder of D2D Advisory, a multi-functional consulting firm. Jonathan has developed growth strategies and alliances for companies in the mobile, networking, gaming, and software industries.

The table below details the performance of a dozen of what we consider typical semis stocks in the hopes of gauging which sectors have felt the pain of this cycle and which may still have more downside.

We did not include Intel in this survey as we felt their prospects are being measured by some very company-specific risks (I.e. will they survive?) while the others are trading more around macro and industry conditions.

Company Name Stock 1 Week 1 Month YTD
Silicon Laboratories SLAB -5.6% -4.2% -42.9%
Texas Instruments TXN -1.1% 0.5% -13.4%
Analog Devices ADI -3.5% 3.1% -16.8%
Qualcomm QCOM 4.7% -1.7% -35.4%
Broadcom AVGO 5.9% -1.6% -30.7%
Nvidia NVDA 6.9% 7.6% -33.9%
AMD AMD 4.4% -9.8% -44.3%
Marvell Technology MRVL 1.7% -6.2% -36.0%
ASML ASML 14.1% 11.0% -39.2%
KLA Corporation KLA 12.7% -0.9% -29.1%
Applied Materials AMAT 14.2% 3.8% -44.4%
Lam Research LRCX 14.1% -0.2% -47.1%
Nasdaq index NASDAQ 2.7% 3.0% -29.9%
PHLX Semiconductor index SOX 6.1% -0.2% -17.7%

We think the data shows some clear patterns by segment. Not all semis stocks are being treated the same. Note that the major analog companies Texas Instruments and Analog Devices have both fallen less than their peers. By contrast, the more consumer-exposed names like Qualcomm and Nvidia are down 30+% this year. The worst hit are the wafer fabrication equipment (WFE) names like Applied Materials and LAM Research.

We think this maps fairly well to how we generally see the industry right now. Semis are obviously in the downward slope of their cyclical pattern. Six months ago we had to argue with people that semis were cyclical, and now that gravity has reasserted itself the markets have taken note.

One important difference between this downturn and past cycles is that the pain is much more spread out. We have seen warning signs in mobile and PC names for almost a year, but in many industrial categories (I.e. automotive) supply has only just caught up with demand. We interpret this as meaning that the industrial and analog names may be vulnerable as we move into next year. We recognize that this is highly debatable. After all TXN gave a fairly dour outlook on their call this week and the stock hardly budged.

And then there are the WFE names. These companies have been hurt fairly badly by the latest US sanctions against China chip companies, but their declines over the past month, a period covering the announcement of those tougher restrictions, are much smaller than their declines this year implying the market is more concerned with the overall semis environment.

That leaves us with the data center and networking stocks. This is a bit harder to parse from the data. AMD got hit fairly hard on their latest earnings, but they attributed those poor results to a slowdown in PCs and not the data center results.

By contrast, Broadcom has fared better than their peers this year, is that a sign of confidence in their networking and data center products? After all they have a lot of exposure to mobile and consumer. And it is also fair to ask if AVGO even trades as a semis stock anymore. We continue to think that demand for data center semis will eventually take a pause, but the market seems to disagree.

All this leaves us with the question is now the right time to enter semis stocks? We think it is still too soon. End demand is weak, inventories are still elevated, and there may be a big recession looming. Valuation multiples are still high. We tend to think the time to buy semis will come when we stop valuing these companies on revenue multiples and go back to earnings metrics. Regardless, the pace of this downturn remains protracted, hitting each segment at a different time. When semis stocks really do start to recover, maybe in the middle of next year, we will have seen all the segments take a hit.

Image credit: Peter Herrmann, Vishnu Mohanan

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R00sT3R

Posts: 773   +2,403
This right now is just the usual market correction that takes place every now and then as investors cash out and turn to liquidity.

Wait until it all kicks off with China in the Pacific over Taiwan, That's then you'll see the true tech stock apocalypse.

..but then we'll all have more important things to worry about other than money.
 

kiwigraeme

Posts: 1,399   +1,038
Quoted "We tend to think the time to buy semis will come when we stop valuing these companies on revenue multiples and go back to earnings metrics."

least these are real companies with real fundamentals - always amazed when some company comes out of no where - the next greatest thing from some silicon valley type startup - and the day they are floated are valued more than real companies - yet they sometimes have not even earnt one dollar .

The funny thing here is no winners - chips have always been cylindrical - this fascination with revenue growth - won't be PCs , won't be phones - yeah server farms will get bigger , but have we really started the next wave of technology ? - automation in the factories first before in our homes .
The cost of labour is going up - the service industry doesn't pay great - so automation there or endless migrants to fill health and nursing homes, home care .
You can see why controlling people is becoming extremely important for Apple ,Microsoft , Google, facebook etc - they are like Kingdoms of old fighting over serfs and subjects.
That's why Google is stupid with security updates - such low cost to control vast hoards of eyes (adverts ) and spenders on apps and subscriptions

Again that's why I laugh when Apple users pretend they are not the product
 

Uncle Al

Posts: 9,363   +8,581
With the recent announcement of this administration, we have all but decimated the Chinese chip makers with tight resrtictions of what can come in and go out from China. This may be the first step in the dismantling of all of China's IT industries ..... only time will tell.