Wall Street analysts are predicting a rough third-quarter earnings season for semiconductor stocks amid slowing demand, high inventories, and macroeconomic uncertainty.
Analysts see chipmakers possibly cutting their estimates for the fourth quarter and year ahead. Memory chips and PC processors are already in a cyclical downturn and data center chips could be next to fall.
Semiconductor stocks are in their steepest slide since the global financial crisis of 2007-2008. Year to date, the Philadelphia semiconductor index, known as Sox, is down 44.3%. That compares with a 25% drop for the S&P 500 index. The Sox includes the 30 largest semiconductor stocks traded in the U.S.
"There is no hiding the fact that investor sentiment appears extremely negative with little light at the end of the tunnel in the near term," Needham analyst Quinn Bolton said in a note to clients Tuesday. "As companies cut guidance further, we expect investors will feel more comfortable stepping into semiconductor names."
Third-Quarter Earnings Season Begins
Among semiconductor stocks, Bolton likes four names that should see less volatility than their peers this earnings season. They are Credo Technology, Macom Technology Solutions, MaxLinear and Monolithic Power Systems. He has buy ratings on those stocks.
The third-quarter earnings season for semiconductor stocks kicks off Thursday with a report from Taiwan Semiconductor Manufacturing.
"Semiconductor weakness clearly started in consumer-facing markets," Bolton said. This is evidenced by negative announcements from AMD, Intel, Micron, Nvidia and Samsung, he said. Soft sales of consumer electronics, PCs and Android smartphones hit those chipmakers.
"At the start of the weakness in consumer demand, there was an initial consensus that demand weakness might be limited to consumer markets as these markets benefited from a Covid demand bump and that the analog, industrial, automotive, and data center markets would continue to grow given secular demand trends and extensive backlogs," Bolton said. "However, this is no longer the case as signs of demand deterioration are spreading across most end-markets."
Chipmakers with high exposure to consumer devices will face an inventory correction that will last at least through the first half of 2023, Bolton said. Inventory adjustments in the automotive and industrial markets could last into the second half of 2023, he said.
Six Semiconductor Stocks Called Top Picks
Semiconductor stocks have priced in a cyclical downturn but not a possible recession, BofA Securities analyst Vivek Arya said.
The Sox index is likely to trough when U.S. interest rates and the dollar peak, Arya said. Further, he forecast a bottom for the Sox in the fourth quarter and a semiconductor industry recovery in the second half of 2023 in his note to clients Wednesday.
In another note, Evercore ISI analyst C.J. Muse said a bottom for the Sox is difficult to call given the coming inventory correction and "a clear stair-step down in global end demand."
Additionally, Muse favors six semiconductor stocks as "top picks" in the current environment. They are Analog Devices, Broadcom, ASML, Marvell Technology, Texas Instruments and Wolfspeed.
Susquehanna Financial Group analyst Mehdi Hosseini said the semiconductor industry will need to clear out its high inventories of chips in the first half of 2023 or it could face a "slow and prolonged correction" that would last one to two years.
"The deeper the production cuts are in first-half 2023, the rosier the outcome will be looking a year out," he said in a note.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
