Tech boom chased by fear of weak chip industry

Technology stocks are on shaky ground despite last week’s rally as chip makers signal more trouble may lie ahead in an industry notorious for booms and busts.

Semiconductor stocks fell amid a series of company warnings about slowing demand for chips used in a range of electronic devices such as cell phones. The Philadelphia Semiconductor Index is down 11% over the past four weeks, reversing its 7% decline in the Nasdaq 100, as slowdowns as Nvidia Corp hit its 2022 lows.

Investors are concerned that the sluggish demands that have already plagued makers of memory chips and other components used in personal computers may spread to the rest of the semiconductor industry.

Compounding these concerns is the Biden administration’s focus on curbing chip exports to China and the Federal Reserve intent on raising interest rates dramatically to stave off inflation.

“There is a concrete fear that the semiconductor cycle is beginning to turn negative and that demand is slowing,” said Jason Benowitz, a senior fund manager at Roosevelt Investment Group in New York. “If the economic downturn turns out to be deeper, longer and broader, we would expect technology to perform poorly as well.”

The technical selling since mid-August is a reversal of what it was two months ago when the sector led a recovery in the S&P 500 amid optimism that inflation was taking the lead, a scenario that traders believe will give the Federal Reserve the flexibility to slow interest rate hikes.

This optimism was silenced on August 26 by Central Bank President Jerome Powell, who used his Jackson Hole speech to respond to the idea that it would soon reverse course.

Samsung Electronics added to concerns last week after a senior executive at the world’s largest chip maker said the outlook for the second half of the year is bleak and does not see momentum for a recovery in 2023. This came after weak sales expectations from companies such as Micron Technology Inc and Western Digital Corp.

supply chains

Semiconductors take months to go through a complex manufacturing process and chip buyers are very concerned about repeating supply chain shortages that have arisen after the Covid-19 pandemic caused demand to spike, making industry orders an indicator of future demand for electronics and more. goods.

Nvidia, which makes graphics processors used in personal computers and data centers, has lost more than half its market value this year amid a slump in top-rated stocks. However, the stock remains a favorite for retail investors who have made more than $600 million in net purchases over the past two weeks, according to research firm Vanda.

Adding to the pain are the Biden administration’s moves to restrict China’s access to chipmaking equipment. The United States plans to expand restrictions on its shipments of semiconductors for artificial intelligence and chip-making tools to China, Reuters reported, citing anonymous people familiar with the matter.

China restrictions

The Commerce Department planned to publish new regulations based on the restrictions sent in letters to KLA Corp, Lam Research Corp, and Applied Materials Inc. The agency has banned the export of chipmaking equipment to factories in China that produce 14nm or more advanced semiconductors, unless vendors obtain licenses, Bloomberg News reported in July.

Analysts have lowered earnings estimates for semiconductor companies more than other parts of the technology sector. Earnings for chip-related companies in the S&P 500 are expected to remain flat in 2023, down from a 12% growth forecast just three months ago, according to data compiled by Bloomberg Intelligence.

By contrast, earnings for the broader IT sector are expected to expand 6%, down from 11% over the same period.

Joseph Moore, an analyst at Morgan Stanley, said last week that he sees increasing challenges for chipmakers as stocks rise. “We expect each sector to show some degree of inventory correction over the next 12-18 months,” he wrote in a research note, referring to the semiconductor industry.

Low Ratings

Optimistic investors argue that most of the bad news has already been priced in, creating an opportunity to buy chip makers with low valuations. The chip index is priced at 15 times expected earnings over the next 12 months, down from a high of 24 in January 2021, and below the average of 16 over the past decade.

However, the last time the Fed embarked on a similar tightening campaign in 2018, causing tech stocks to explode, the Philadelphia Semiconductor Index didn’t bottom until the multiplier dropped to 11.

Christopher Daniele of Citigroup sees parallels with the fall of semiconductors about a decade ago. “We remain cautious about the semi-finals and believe this downturn is similar to the 2011/12 downturn, due to multiple downturns, contraction in demand and inventory correction,” he said.

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