How the Mighty Have Fallen

Apparently, the stock market has fallen out of love with semis stocks. Most major semis stocks are down this year, some by half. The SOX Semis index is down almost 18% this year. We are not in the markets on a daily basis anymore, but as the Street progresses through earnings season, we thought we would take stock on stocks.

The table below details the performance of a dozen of what we consider typical semis stocks in the hopes of gauging which sectors have felt the pain of this cycle and which may still have more downside. We did not include Intel in this survey as we felt their prospects are being measured by some very company-specific risks (i.e. will they survive?) while the others are trading more around macro and industry conditions.

Stock1 Week1 MonthYTD
Source: Yahoo Finance

We think the data shows some clear patterns by segment. Not all semis stocks are being treated the same. Note that the major analog companies Texas Instruments and Analog Devices have both fallen less than their peers. By contrast, the more consumer-exposed names like Qualcomm and Nvidia are down 30+% this year. The worst hit are the wafer fabrication equipment (WFE) names like Applied Materials and LAM Research.

We think this maps fairly well to how we generally see the industry right now. Semis are obviously in the downward slope of their cyclical pattern. Six months ago we had to argue with people that semis were cyclical, and now that gravity has reasserted itself the markets have taken note. One important difference between this downturn and past cycles is that the pain is much more spread out. We have seen warning signs in mobile and PC names for almost a year, but in many industrial categories (i.e. automotive) supply has only just caught up with demand. We interpret this as meaning that the industrial and analog names may be vulnerable as we move into next year. We recognize that this is highly debatable. After all TXN gave a fairly dour outlook on their call this week and the stock hardly budged.

And then there are the WFE names. These companies have been hurt fairly badly by the latest US sanctions against China chip companies, but their declines over the past month, a period covering the announcement of those tougher restrictions, are much smaller than their declines this year implying the market is more concerned with the overall semis environment.

That leaves us with the data center and networking stocks. This is a bit harder to parse from the data. AMD got hit fairly hard on their latest earnings, but they attributed those poor results to a slowdown in PCs and not the data center results. By contrast, Broadcom has fared better than their peers this year, is that a sign of confidence in their networking and data center products? After all they have a lot of exposure to mobile and consumer. And it is also fair to ask if AVGO even trades as a semis stock any more. We continue to think that demand for data center semis will eventually take a pause, but the market seems to disagree.

All this leaves us with the question is now the right time to enter semis stocks? We think it is still too soon. End demand is weak, inventories are still elevated, and there may be a big recession looming. Valuation multiples are still high. We tend to think the time to buy semis will come when we stop valuing these companies on revenue multiples and go back to earnings metrics. Regardless, the pace of this downturn remains protracted, hitting each segment at a different time. When semis stocks really do start to recover, maybe in the middle of next year, we will have seen all the segments take a hit.

Photo by Micah Williams on Unsplash

2 responses to “How the Mighty Have Fallen

  1. Re: Valuation multiples are still high. We tend to think the time to buy semis will come when we stop valuing these companies on revenue multiples and go back to earnings metrics.
    Hmmm, As a whole yes but why not as you say “go back to earnings metrics.” and look at individual companies metrics (PE- TTM & FWD).
    Suggest you expand your table to include PE (TTM & Fwd) metrics for each company on your list, and you might notice there is one company that currently stands out as a spectacular value (QCOM)..

    • Fair enough. I was just being snarky. QCOM does really stand out. I think next year is going to be a more challenging for them but not 50% discount challenging.

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