Semiconductor stocks are showing signs of bottoming. But Wall Street needs to see chipmakers cut their sales and earnings estimates before turning positive on the sector.
Typically chip stocks fall ahead of a downturn in semiconductor demand and rise before an actual recovery in the market. Chip demand has turned south for memory chips and PC chips. But other segments remain strong, such as automotive and industrial chips.
IBD's Tech Leaders list includes just three semiconductor stocks: GlobalFoundries, ON Semiconductor and Tower Semiconductor. But Intel is acquiring Tower, buoying its shares.
Investor sentiment toward semiconductor stocks is negative ahead of third-quarter earnings season, which starts in mid-October, Wells Fargo analyst Aaron Rakers said in a note to clients Friday.
Semiconductor Stocks Need A Reset
"Semi stocks are beginning to show signs of bottoming," Rakers said. "However, confidence in the view that there has been a full or appropriate downward reset has not yet been achieved."
Second-quarter results and third-quarter guidance for semiconductor companies were largely favorable relative to expectations, Rakers said. Memory-chip makers were a notable exception, he said. The memory segment has entered a cyclical correction.
"Investors have been questioning the accuracy of forward consensus earnings estimates for semiconductor companies, and we think many are waiting for or would like to see further estimate de-risking before turning bullish on the sector," Rakers said.
Fewer Beat-And-Raise Reports
Last quarter, 79% of semiconductor stocks that Wells Fargo tracks beat analysts' revenue expectations, Rakers said. That compares with 94% in the first quarter and 100% in fourth quarter 2021.
Meanwhile, 61% of those semiconductor stocks predicted third-quarter revenue above analyst estimates. That's down from 74% in the previous quarter and 88% in the quarter before that.
Wells Fargo cut its estimates for semiconductor industry sales for 2022 and 2023. It now sees chip sales rising 4% to 6% in 2022 and declining 10% to 15% in 2023.
The Philadelphia semiconductor index, known as SOX, is down 35.1% year to date. By comparison, the S&P 500 index is down 18.7% so far in 2022. The SOX includes the 30 largest semiconductor stocks traded in the U.S.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
