Bulletin
Investor Alert

Earnings Watch Archives | Email alerts

July 14, 2022, 12:56 p.m. EDT

Are chip stocks set up for a short squeeze, or just more declines? Wall Street doesn’t seem sure

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    PHLX Semiconductor Index (SOX)
  • X
    S&P 500 Index (SPX)
  • X
    NASDAQ Composite Index (COMP)

or Cancel Already have a watchlist? Log In

By Wallace Witkowski

Wall Street believes the party is over for the U.S. chip industry, but what that means for semiconductor stocks as earnings and forecasts pour in is up for debate.

For months, analysts have been concerned that the global semiconductor shortage could flip quickly into a glut when it ended if customers had double- or triple-bought chips in the early days of the COVID-19 pandemic, and chip stocks started selling off at the beginning of 2022 as a result. Over the course of January alone, the chip sector cratered so badly it was at risk of falling into a bear market when other sectors were merely showing corrections.

That selloff has continued to the present even as semiconductor sales continue to climb . The PHLX Semiconductor Index /zigman2/quotes/210598361/realtime SOX -1.26% has fallen 17% over the past three months, compared with a 14% decline in the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.03% and a 18% drop on the tech-heavy Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.52% . Over the course of 2022, that comparison is even more stark, with the SOX index down nearly 35%, compared with a 20% decline in the S&P 500 and a 28% fall on the Nasdaq.

As chip companies prepare to show their hand for the rest of the year in quarterly earnings reports, some analysts believe the selloff has hit the bottom. Mizuho analyst Jordan Klein said he sees a “good chance” that the battered chip sector rallies off lows in the coming weeks given that “sentiment could not be much worse” about the sector. Klein said he sees “the following earnings to come as the likely catalyst for [a] short squeeze.”

Read: Why semiconductor stocks are ‘almost uninvestable’ despite record earnings amid a global shortage

A bounceback has become fairly commonplace for chip stocks during earnings season, according to Jeffries analyst Mark Lipacis. He pointed out the semiconductor sector has underperformed the broader market heading into earnings season over the past four quarters, only to outperform through it.

“Investor expectations seem so low that if management teams merely showed up and started their earnings calls on time, that could be viewed as a positive surprise,” Lipacis said.

There could be many more shoes to drop, however, and B of A Global Research analyst Savita Subramanian said in a report Tuesday that investors should not be looking at the tech sector as a defensive play right now.

“Investors who view Tech as defensive, citing stable earnings during the past two recessions, may be disappointed in the next one,” Subramanian said.

The plunge in crypto prices could hit a company like Nvidia Corp. /zigman2/quotes/200467500/composite NVDA -1.51% , whose chips have been used to mine cryptocurrencies like Ethereum /zigman2/quotes/108573964/realtime ETHUSD +0.34% . And the elephant in the room is the cratering market for personal computers, which suffered its worst quarterly unit sales drop in nine years or since the mid-1990s, depending on whose Apple Inc. /zigman2/quotes/202934861/composite AAPL -1.96% estimates you want to believe.

In late June, B of A chip analyst Vivek Arya said chip stocks could hit a trough later in the third quarter, but also voiced concerns that the weakness in some segments could creep into what have so-far been considered safe areas, like enterprise server sales.

“Near-term consumer risks (PC, 5G phones, gaming cards) could spill over to data center/cloud/enterprise, where demand thus far has been solid,” Arya said.

Citi Research analyst Christopher Danley said Wednesday he remains negative on the sector, remarking “here come the cuts, but it will get worse before it gets better.”

The downturn in PCs and speculation about data-center sales put most eyes on Intel Corp. /zigman2/quotes/203649727/composite INTC -1.11% and Advanced Micro Devices Inc. /zigman2/quotes/208144392/composite AMD -1.65% , which are the major suppliers of CPUs to the PC market. Both companies have been judged more of late by their data-center efforts, where AMD executives have successfully managed to make the company a legitimate competitor to Intel after decades of playing second fiddle.

Read: PC industry suffered worst decline in years, but how bad it is depends on Apple

So far, results have been OK but forecasts have been more scary. Memory-chip maker Micron Technology Inc. /zigman2/quotes/205710729/composite MU -0.88% was quick to point out late last month that it’s disappointing outlook for its August-ending quarter was because of a drop in PC and smartphone demand, not in the all-important, high-growth data-center category, but some analysts were concerned that caution flags were beginning to emerge there .

Samsung Electronics Co. /zigman2/quotes/209800866/delayed KR:005930 -0.65% issued a downbeat forecast last week for its quarterly report, following a string of record quarters for the Korean electronics giant. On the other hand, Taiwan Semiconductor Manufacturing Co. /zigman2/quotes/204359850/composite TSM -0.70% , which reported better-than-expected June revenue , topped Wall Street expectations when it reported results for its June-ending quarter early Thursday.

Most of the U.S. chip-related companies have seen their Wall Street expectations decline over the past three months, indicating increased pessimism in the sector. Only one company in the group of reports expected in the next couple of weeks has seen expectations rise over that time: Texas Instruments Inc. /zigman2/quotes/202237907/composite TXN -1.07% , which happens to be the largest U.S. supplier of auto chips, and has been one of the better chip stock performers over the course of the year, with a decline of 19% versus the SOX index’s 35% drop.

For Texas Instruments, analyst estimates have risen slightly over the course of the past three months with earnings per share up to $2.13 from $2.10, and revenue up to $4.65 billion from $4.62 billion, according to FactSet data. Those higher levels, however, are still below the estimates of $2.26 on revenue of $4.94 billion before the company issued a conservative outlook as it expected its customers to be hurt by the COVID-19 shutdowns in China at the time.

AMD’s estimates have remained steady at their post-outlook jump at $1.02 a share on revenue of $6.43 billion, according to FactSet, and on Thursday, BMO Capital upgraded the stock to “outperform,” citing the company’s continued momentum and expanded share in the server market . Prior to the report, analysts had estimated AMD earnings of 95 cents a share on revenue of $5.14 billion. At  AMD’s analyst day in June , the chip maker stuck to its  outlook issued in May,  and said it expects average annual growth of about 20% over the next three to four years.

Over the past three months, however, Intel’s Wall Street estimates have slid further since they dropped significantly after the company doubled down on its bullish 2022 outlook  even though the current quarter shows signs of weakness. Intel’s Wall Street earnings consensus has declined to 70 cents a share from 71 cents a share for earnings, and to $17.97 billion from $18.08 billion for revenue. Prior to last quarter’s earnings report, analysts had estimated 81 cents a share on revenue of $18.41 billion.

Cowen analyst Matthew Ramsay, who has an outperform rating and a $120 price target on AMD, holds out hope that the chip maker can beat the odds and turn in a good report amid all the macro headwinds.

“While our checks point to a weakening macro environment weighing on the PC and other end markets, we remain positive on AMD’s outlook. Recent commentary and the reiterated 2022 guidance at the Analyst Day showcase that AMD’s story centers around its share gain potential and broadening portfolio,” Ramsay said.

For the broader chip market, Ramsay said to expect more earnings beats not being rewarded and misses being punished, as “we’re not at the semi ‘clearing event’ just yet.”

In the first round of U.S.-reporting companies, Texas Instruments is expected to report on July 26, Qualcomm Corp. /zigman2/quotes/206679220/composite QCOM -1.36% and equipment maker Lam Research Corp. /zigman2/quotes/208077897/composite LRCX -1.77% on July 27, while Lam rival KLA /zigman2/quotes/209248041/composite KLAC -1.45% and Intel report on July 28. AMD is scheduled to report on August 2.

/zigman2/quotes/210598361/realtime
US : Nasdaq
2,751.27
-35.15 -1.26%
Volume: 90,030
Nov. 25, 2022 4:14p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
4,026.12
-1.14 -0.03%
Volume: 0.00
Nov. 25, 2022 2:32p
loading...
/zigman2/quotes/210598365/realtime
US : Nasdaq
11,226.36
-58.96 -0.52%
Volume: 2.23B
Nov. 25, 2022 4:30p
loading...
/zigman2/quotes/200467500/composite
US : U.S.: Nasdaq
$ 162.70
-2.49 -1.51%
Volume: 16.79M
Nov. 25, 2022 1:00p
P/E Ratio
69.22
Dividend Yield
0.10%
Market Cap
$405.12 billion
Rev. per Employee
$1.27M
loading...
/zigman2/quotes/108573964/realtime
US : Kraken
1,214.10
+4.17 +0.34%
Volume: 15.90M
Nov. 27, 2022 6:10a
loading...
/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 148.11
-2.96 -1.96%
Volume: 35.20M
Nov. 25, 2022 1:00p
P/E Ratio
24.27
Dividend Yield
0.62%
Market Cap
$2356.15 billion
Rev. per Employee
$2.40M
loading...
/zigman2/quotes/203649727/composite
US : U.S.: Nasdaq
$ 29.34
-0.33 -1.11%
Volume: 11.31M
Nov. 25, 2022 1:00p
P/E Ratio
9.05
Dividend Yield
4.98%
Market Cap
$121.09 billion
Rev. per Employee
$574,236
loading...
/zigman2/quotes/208144392/composite
US : U.S.: Nasdaq
$ 75.14
-1.26 -1.65%
Volume: 26.02M
Nov. 25, 2022 1:00p
P/E Ratio
45.02
Dividend Yield
N/A
Market Cap
$121.15 billion
Rev. per Employee
$1.47M
loading...
/zigman2/quotes/205710729/composite
US : U.S.: Nasdaq
$ 58.41
-0.52 -0.88%
Volume: 4.36M
Nov. 25, 2022 1:00p
P/E Ratio
7.55
Dividend Yield
0.74%
Market Cap
$63.50 billion
Rev. per Employee
$640,792
loading...
/zigman2/quotes/209800866/delayed
KR : S. Korea: KRX
61,000.00
-400.00 -0.65%
Volume: 6.68M
Nov. 25, 2022 3:30p
P/E Ratio
9.90
Dividend Yield
2.37%
Market Cap
₩409909.25 billion
Rev. per Employee
₩2.72B
loading...
/zigman2/quotes/204359850/composite
US : U.S.: NYSE
$ 81.40
-0.57 -0.70%
Volume: 5.91M
Nov. 25, 2022 1:10p
P/E Ratio
13.84
Dividend Yield
1.73%
Market Cap
$418.14 billion
Rev. per Employee
$1.10M
loading...
/zigman2/quotes/202237907/composite
US : U.S.: Nasdaq
$ 177.07
-1.91 -1.07%
Volume: 1.59M
Nov. 25, 2022 1:00p
P/E Ratio
18.54
Dividend Yield
2.80%
Market Cap
$160.70 billion
Rev. per Employee
$651,290
loading...
/zigman2/quotes/206679220/composite
US : U.S.: Nasdaq
$ 123.45
-1.70 -1.36%
Volume: 3.15M
Nov. 25, 2022 1:00p
P/E Ratio
10.85
Dividend Yield
2.43%
Market Cap
$138.39 billion
Rev. per Employee
$866,667
loading...
/zigman2/quotes/208077897/composite
US : U.S.: Nasdaq
$ 453.25
-8.15 -1.77%
Volume: 378,949
Nov. 25, 2022 1:00p
P/E Ratio
13.00
Dividend Yield
1.52%
Market Cap
$61.81 billion
Rev. per Employee
$1.01M
loading...
/zigman2/quotes/209248041/composite
US : U.S.: Nasdaq
$ 380.02
-5.61 -1.45%
Volume: 624,364
Nov. 25, 2022 1:00p
P/E Ratio
17.16
Dividend Yield
1.37%
Market Cap
$53.86 billion
Rev. per Employee
$702,065
loading...

This Story has 0 Comments
Be the first to comment
More News In
Industries

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.