By Wallace Witkowski, MarketWatch
For the semiconductor industry, 2019 was the best of years and the worst of years all in one: Chip-related stocks turned in their best performance in a decade, while sales declined at a rate not seen since the last economic downturn.
The PHLX Semiconductor Index /zigman2/quotes/210598361/realtime SOX -0.08% increased 60.1% in 2019, its strongest performance since 2009, when the index rallied nearly 70%. That move came despite large earnings and revenue declines for most chip companies — the Semiconductor Industry Association recently predicted a 12.8% decline in sales for the year, which would be the worst decline since the economic nadir of 2009.
So why that disparity? Well, analysts say that 2018’s record year of sales was fueled by buyers building up huge inventories to get ahead of potential China tariffs and prices in memory chips that had been on the rise. Now, as those inventories have been used up and trade-war fears have lessened, 2020 is expected to pick up where 2018 left off — with expectations that most consumer products will be “smart” thanks to a chip, or many, inside.
“People are trying to put intelligence down into the smallest things,” said Maribel Lopez, principal analyst at Lopez Research, in an interview. “Everybody had a good run of it and I think that run is going to continue into 2020 because the need for intelligent hardware is not changing, it’s only expanding.
“So all up and down the stack, from the smallest gizmos to the most high-performance-style computer architectures, I think we’re going to see another great year for chips,” Lopez said.
There have been doubts throughout the year from investment analysts, but more optimistic outlooks near the end of the year seemed to sway sentiment. Even Morgan Stanley recanted its bearish view of the sector, saying it was “clearly wrong” given the sector’s stock performance in 2019.
“Sure, we see strong secular growth in content centered around AI and autos, but would also call attention to markets like consumer and PCs that are declining and smartphones ex-growth longer term despite a reprieve expected with 5G the next two years,” Morgan Stanley analyst Joseph Moore said.
The most prominent chip stock of the year was Advanced Micro Devices Inc. /zigman2/quotes/208144392/composite AMD -1.00% , the biggest percentage gainer for the year in the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.15% as it bucks the overall semiconductor trend and heads toward annual gains in profit and sales. But even the worst-performing stocks on the SOX index are up 20% or more on the year. Intel Corp. /zigman2/quotes/203649727/composite INTC -0.04% , amid problems with production, still rose 27.5%, Broadcom Inc. /zigman2/quotes/200646538/composite AVGO -0.64% was up 24.3%, and Maxim Integrated Products Inc. /zigman2/quotes/201861354/composite MXIM +0.59% gained 21%.
Chip-related stocks outperforming SOX index in 2019
|Stock||2019 performance Y-T-D||Best performance since year — gain|
|Cirrus Logic Inc. /zigman2/quotes/208789077/composite CRUS||148%||2009 — 154%|
|Advanced Micro Devices Inc. /zigman2/quotes/208144392/composite AMD||148%||2016 — 295%|
|Teradyne Inc. /zigman2/quotes/208321188/composite TER||117%||2009 — 154%|
|Lam Research Corp. /zigman2/quotes/208077897/composite LRCX||115%||2003 — 199%|
|KLA Corp. /zigman2/quotes/209248041/composite KLAC||99%||1999 — 157%|
|Qorvo Inc. /zigman2/quotes/209919828/composite QRVO||91%||2014 — 222%|
|Applied Materials Inc. /zigman2/quotes/209393259/composite AMAT||86%||1999 — 197%|
|Cypress Semiconductor Corp.||83%||2009 — 136%|
|Entegris Inc. /zigman2/quotes/200628784/composite ENTG||80%||2009 — 141%|
|Nvidia Corp. /zigman2/quotes/200467500/composite NVDA||76%||2017 — 81%|
|Skyworks Solutions Inc. /zigman2/quotes/201417573/composite SWKS||80%||2014 — 155%|
|Micron Technology Inc. /zigman2/quotes/205710729/composite MU||69%||2017 — 88%|
|MKS Instruments Inc. /zigman2/quotes/208573663/composite MKSI||70%||2003 — 77%|
AMD’s optimism remained fairly constant in 2019 and appears to continue into 2020. At the beginning of 2019, AMD was the only major chip company showing any optimism, mostly because the year signalled the rollout of its 7-nanometer products meant to further sap share from Intel, which has yet to roll out its next-generation 10-nanometer chips. In chip parlance, nanometers, or nm, refers to the size of the transistors that go on a computer chip, with the general rule being that smaller transistors are faster and more efficient in using power.
But even as chip makers such as Texas Instruments Inc. /zigman2/quotes/202237907/composite TXN -0.93% and Xilinx Inc. /zigman2/quotes/209389378/composite XLNX -0.07% have not returned to optimism, major players like Intel and Nvidia have. Intel, in its last earnings report, reported what it called the best quarter in its history and forecast meaningful AI and data-center growth.
Meanwhile, Nvidia forecast a return to revenue growth after four quarters of declines and improving margins in the wake of a crypto-influenced gain in 2018 that led to an inventory glut of its graphics chips. Jefferies analyst Mark Lipacis, who has a buy rating on Nvidia, said the company is entering a second phase of data-center growth with conversational AI and natural-language processing, as well as holding a dominant position in gaming.
“We continue to believe Nvidia has created a moat with its platform and ecosystem, and expect it to remain the dominant beneficiary from AI proliferation,” Lipacis said.