Samsung Electronics added to concerns last week after a senior executive at the world’s largest chipmaker said the outlook for the second half of the year is gloomy and it isn’t seeing momentum for a recovery in 2023. That followed weak sales forecasts from companies such as Micron Technology and Western Digital.
Supply Chains
Semiconductors take months to go through a complicated manufacturing process and chip buyers are acutely concerned about a recurrence of supply-chain shortages that arose after the COVID-19 pandemic caused demand to soar, making the industry’s orders an indicator of future demand for electronics and other goods.
Nvidia, which makes graphics processors used in personal computers and data centres, has lost more than half of its market value this year amid a rout in stocks with lofty valuations. The stock, however, remains a favourite for retail investors who have made more than $US600 million in net purchases over the past two weeks, according to research firm Vanda.
Adding to the pain is the Biden administration’s moves to restrict China’s access to chipmaking equipment. The US is planning to broaden curbs on its shipments of semiconductors for artificial intelligence and chipmaking tools to China, Reuters reported, citing unidentified people familiar with the matter.
China Restrictions
The Commerce Department planned to publish new regulations based on restrictions communicated in letters to KLA, Lam Research and Applied Materials. The agency banned them from exporting chipmaking equipment to factories in China that produce 14-nanometer or more advanced semiconductors, unless the sellers obtain licenses, Bloomberg News reported in July.
Analysts have slashed profit estimates for semiconductor companies more than other parts of the tech sector. Earnings for chip-related companies in the S&P 500 are projected to be flat in 2023, down from expectations of 12 per cent growth just three months ago, according to data compiled by Bloomberg Intelligence.
By contrast, profits for the broader information technology sector are projected to expand 6 per cent, down from 11 per cent over the same span.
Morgan Stanley analyst Joseph Moore said last week he sees increasing challenges for chipmakers with inventories on the rise. “We expect every sector to show some degree of inventory correction in the next 12-18 months,” he wrote in a research note, referring to the semiconductor industry.
Depressed Valuations
Bullish investors argue that most of the bad news is already priced in, creating an opportunity to buy chipmakers at depressed valuations. The chip index is priced at 15 times earnings projected over the next 12 months, down from a high of 24 in January 2021, and below the average of 16 over the past decade.
However, the last time the Fed embarked on a similar tightening campaign in 2018, causing technology stocks to crater, the Philadelphia semiconductor index didn’t bottom out until the multiple fell to 11.
Citigroup’s Christopher Danely sees parallels with a semiconductor slump about a decade ago. “We remain cautious on semis and believe this downturn is similar to the 2011/2012 downturn, due to multiple contraction, demand contraction and inventory correction,” he said.
Bloomberg
