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Nov. 25, 2019, 3:13 p.m. EST

Semiconductor stocks are bubbly, as companies’ sales are worse than most investors think

Most of the double-digit sales growth expected next year will be about regaining lost ground to get back to 2017 levels

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By Beth Kindig


Bloomberg
Intel spent more on share buybacks (at high prices) in the third quarter than it did on research and development.

U.S. corporate earnings have been declining yet quarterly “beats” are celebrated and being duly rewarded.

As companies continue to clear low hurdles, stocks and their related ETFs are sent soaring. Nowhere is this more evident than in the semiconductor sector. This is especially troublesome when company management in large part is forecasting another flat to negative year across the board.

There are outliers, but the materials sector as a whole is reporting a 19% decline in earnings, while the iShares PHLX Semiconductor ETF /zigman2/quotes/209255350/composite SOXX +1.05%  is up 45% this year. MarketWatch’s Philip van Doorn recently reported that 12 of 30 semiconductor companies are expected to return to growth next year, up from three this year, according to a review of analysts who cover the industry. However, van Doorn provided analysts’ 12-month price targets Oct. 8, and semiconductors have already blown past those targets since the analysis was published, leaving little room for upside.

Keep in mind that most of the double-digit sales growth expected next year will be regaining lost ground to get back to 2017 levels — before the U.S. trade conflict with China. Meanwhile, because of flat earnings, the stocks are much more expensive than they were in December.

Intel

Intel’s /zigman2/quotes/203649727/composite INTC +0.14%  third-quarter earnings press release provided a perfect example of how declining earnings are being sold to investors. The company said: “Third-quarter revenue of $19.2 billion set a new record and exceeded July guidance, driven by record data-centric revenue.”

Digging a little further, sales of $19.19 billion were up slightly from $19.16 billion a year earlier — essentially flat — while the company’s gross margin narrowed to 58.9% from 64.5%. The stock is currently trading near a 52-week high.

With that said, Intel’s buybacks are impressive, with a $20 billion increase in its stock-repurchase program. In the third quarter alone, the company used $4.5 billion to repurchase 92 million shares.

The other side to buybacks for tech leaders is they risk losing ground. In April, Intel lost a battle to Qualcomm /zigman2/quotes/206679220/composite QCOM -0.86%  in 5G chips. Many investors are also aware Advanced Micro Devices /zigman2/quotes/208144392/composite AMD -3.59% is nipping at Intel’s heels for the CPU-powered cloud-data center. Silicon Valley is now throwing its hat into the ring with startups such as Nuvia , a team of chip designers who received $53 million in funding to take on Intel and AMD.

Buybacks for tech companies in a highly competitive space is a backward approach, as the money should be spent on innovation. Intel is at a critical junction for macro trends, such as the 5G ramp-up and cloud-data-center push, and should be spending to maintain its lead. During the company’s earnings call, CEO Bob Swan said the world had become more competitive and “[Intel] is going to compete to protect our position and expand the role we play” — most likely referring to AMD.

Intel’s $4.5 billion in share buybacks last quarter were higher than the company’s $3.2 billion in R&D spending, proving the company is competing to meet consensus earnings estimates rather than to increase market share.

Intel’s forward full-year sales guidance was “raised” to $71 billion, or 0.2% revenue growth.

AMD

AMD is a promising company that executes well against gorilla-sized competitors, with annual revenue of $6.5 billion compared with Intel’s roughly $70 billion.

In July, the company lowered its guidance, which it met for the third quarter. The market is rewarding AMD for regaining lost ground, but the response is teetering on exuberance. The stock is up 124% this year, for the best performance among the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.23% . If the company meets guidance, its annual sales will total $6.7 billion, up from $6.48 billion last year.

/zigman2/quotes/209255350/composite
US : U.S.: Nasdaq
$ 247.24
+2.57 +1.05%
Volume: 1.44M
May 26, 2020 4:00p
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/zigman2/quotes/203649727/composite
US : U.S.: Nasdaq
$ 62.34
+0.09 +0.14%
Volume: 20.93M
May 26, 2020 4:00p
P/E Ratio
12.07
Dividend Yield
2.12%
Market Cap
$263.59 billion
Rev. per Employee
$659,665
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/zigman2/quotes/206679220/composite
US : U.S.: Nasdaq
$ 78.02
-0.68 -0.86%
Volume: 10.07M
May 26, 2020 4:00p
P/E Ratio
23.13
Dividend Yield
3.33%
Market Cap
$88.53 billion
Rev. per Employee
$607,486
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/zigman2/quotes/208144392/composite
US : U.S.: Nasdaq
$ 53.19
-1.98 -3.59%
Volume: 51.62M
May 26, 2020 4:00p
P/E Ratio
128.35
Dividend Yield
N/A
Market Cap
$64.61 billion
Rev. per Employee
$641,089
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/zigman2/quotes/210599714/realtime
US : S&P US
2,991.77
+36.32 +1.23%
Volume: 3.36B
May 26, 2020 5:20p
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