The Chips Are Down: Weak Forecasts Hurt Semiconductor Stocks

The bull market run that began in 2009 is mostly powered by tech stocks. Semiconductor stocks, which have nearly 14-percent weighting in the tech sector, have also had a fairly good run.

October Mayhem

The iShares PHLX Semiconductor ETF SOXX, an ETF tracking the investment results of an index composed of U.S. semiconductor stocks, has gained about 380 percent from the $35 level in April 2009.

The fund peaked at $196.31 in March 2018 before drifting sideways in a range, only to pullback sharply beginning in early October. The fund has lost about 10 percent from an October high of $185.86.

Slowdown: A Common Theme

The chip sector saw renewed selling across the board Friday morning. The trigger for the most recent downward move: weak forecasts issued by graphics chipmaker NVIDIA Corporation NVDA and chip equipment maker Applied Materials, Inc. AMAT.

Nvidia reported a Q3 revenue miss and guided to below-consensus revenue in Q4.

"Gaming was the major source of the lower guidance," Barclays analyst Blayne Curtis said in a note.

At last check, Nvidia shares were tumbling 18.43 percent to $165.09.

Applied Materials forecast year-over-year declines in Q1 revenue and non-GAAP EPS, with both metrics trailing consensus estimates. The stock was reacting with a 0.63-percent move to the downside at the time of publication.

Advanced Micro Devices, Inc. AMD shares shed about 26 percent over three sessions in reaction to Q3 results released Oct. 24.

AMD reported mere single-digit Q3 revenue growth, which was below Street expectations, and forecast a Q4 revenue shortfall.

Ahead of AMD, Texas Instruments Incorporated TXN also warned of a slowdown.

"Revenue increased 4 percent from the same quarter a year ago; however, demand for our products slowed across most markets," the company said in its earnings release.

Channel inventory overhang has been cited by most chipmakers as the reason for the predicament.

Intel Corporation INTC bucked the trend, with a solid earnings beat and in-line revenue, while also guiding Q4 EPS and revenue above the consensus.

Source: Yahoo

Asian Chipmakers Follow U.S. Counterparts Lower

Thursday's weak tidings from U.S. semiconductor stocks reverberated through Asia, with SoftBank Group Corp – ADR SFTBY, foundry Taiwan Semiconductor Mfg. Co. Ltd. TSM and chip equipment makers Advantest Corp ATEYY and TOKYO ELECTRON/ADR TOELY all bearing the brunt of the sell-off.

Calling Time On Chip Bull Run?

End market demand is faltering, and a channel inventory glut and weak pricing are hurting chipmakers.

Chip equipment makers, which supply the precision equipment used in chip manufacturing, are the ones hit first as customers scale back on orders.

The Sino-American trade standoff has made matters worse. Tariffs on products manufactured in China that use chips could hurt demand for products manufactured by chip stocks.

Semiconductors are heading toward a downcycle that started in early 2018 when NAND prices started weakening, said Nomura Instinet analyst Romit Shah, according to CNBC. This was followed by a weakening of DRAM prices.

The scaleback in capex by memory manufacturers such as Samsung Electronics doesn't bode well for the sector, Shah said. 

Broader end markets such as automotive and industrials have also relayed weakness.

Evidence and anecdotes support the deduction that the five-year-old bull market in chip stocks may be meandering to a slow death.

Against this backdrop, caution would be the watchword for those contemplating buying into the sector. 

At time of writing:

• The iShares PHLX Semiconductor ETF was down 2.11 percent to $164.06. 
• The DIREXION SHS ET/DAILY SEMICONDUCTOR SOXL was down 5.61 percent to $100.88. 

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