According to one analyst, semiconductor stocks have received a massive beating in recent months, and it doesn’t look like things are about to get any better. Christopher Danely, a Citi Research analyst, said to expect “a tidal wave of bearishness.”
“Most investors we met with were bearish on the semiconductor group given a belief in recession coming due to increasing inflation, the slowing Chinese economy, and economic impacts of Russia/ Ukraine conflict,” Danely wrote. “In addition, the belief that the semi upturn is in the later stages and there has been inventory built (which we agree with) creates poor risk/ reward if you believe a recession is coming.”
The PHLX Semiconductor Index, known as the Sox, has dropped 23% year to date, though it’s still 0.5% higher than it was last year. According to Danely, several investors are in the process of rebalancing their portfolios as fears surrounding China’s interests in Taiwan continue to mount. Those investors are migrating toward chip companies that aren’t dependent on Taiwan Semiconductor Manufacturing (ticker: TSM) for their chip production. The move favours the likes of Intel (ticker: INTC) and GlobalFoundries (GFS) over Advanced Micro Devices (ticker: AMD) and Nvidia (ticker: NVDA).
TSMC is the world’s most dominant chip maker. According to Danely, AMD has 55% exposure to TSMC, with Broadcom (ticker: AVGO) at 75%, Analog Devices (ticker: ADI) at 40%, Nvidia at 50%, and Marvell Technology (ticker: MRVL) at 60%.
Danely also expressed surprise at the positive sentiment around Intel and Qualcomm (ticker: QCOM).
“Investors are bullish on Intel as the stock serves as a hedge against Chinese takeover of Taiwan and attractive valuation, and on Qualcomm due to share gains in the wireless market and attractive valuation,” he wrote. “We remain cautious on both stocks.” One of Danely’s concerns regarding Intel is the potential slowdown in notebook computer shipments.
On the other side, Danely noted that clients were most bearish on makers of chips for automobiles like NXP Semiconductors (ticker: NXPI), Texas Instruments (ticker: TXN), ON Semiconductor (ticker: ON), Microchip Technology (ticker: MCHP) and Analog Devices referencing the disparity between auto semiconductor revenue and auto production levels. The figures point to the possibility that carmakers will double orders, which is an unsustainable trend, according to Danely.