Things have gotten so bad for semiconductor companies this year that Wall Street is starting to think there’s nowhere else for their shares to go but up.
(Bloomberg) — Things have gotten so bad for semiconductor companies this year that Wall Street is starting to think there’s nowhere else for their shares to go but up.
The selloff in Micron Technology Inc.’s shares this week after its outlook for 2023 prompted Citigroup Inc. and Wells Fargo to predict a bottom is near if not already here for the memory-chip maker. Meanwhile, Nvidia Corp.’s results boosted optimism that growth at the graphics-chip company is poised to re-accelerate. And Applied Materials Inc., the biggest producer of tools to make semiconductors, gave a better-than-feared forecast.
“We’re close to the bottom,” Kim Forrest, founder and chief investment officer at Bokeh Capital Partners, said in an interview. “We’ll bump along and we’ll get some more bad news and prices may go lower, but I don’t know that we really have conditions for companies to stop spending.”
Investors are beginning to price in a turnaround: The Philadelphia semiconductor index, which has risen 26% since its 2022 low in mid-October, traded up 0.7% on Friday. It’s still down by a third this year, on pace for its biggest drop since the financial crisis in 2008.
The industry is grappling with falling demand for electronics after Covid-19 lockdowns helped fuel a boom in sales. US chip export restrictions aimed at depriving China of cutting-edge technologies are also taking a toll.
‘Time to Fish’
Despite risks to the global economy from central banks bent on fighting the highest inflation in decades, the sector’s high profitability, lowered profit estimates and beaten-down valuations are making chipmakers look attractive, according to Bank of America Corp.
“Numerous macro risks exist but seasonality and desire to look past this cycle could re-attract investors to chip stocks,” analyst Vivek Arya wrote in a research note on Nov. 11 titled “Time to fish.”
The past month’s rally has been fueled by optimism that inflation is cooling a bit, which could allow the Federal Reserve to slow the pace of interest rate increases. That’s lifted the broader market as well, but chip stocks, among the most cyclical part of the tech industry, have outperformed as investors speculated a deep recession may be avoided.
The disclosure that legendary value investor Warren Buffett’s Berkshire Hathaway Inc. bought a roughly $5 billion stake in Taiwan Semiconductor Semiconductor Manufacturing Co. also helped lift spirits. The world’s biggest contract manufacturer of chips, which counts Apple Inc. among its biggest customers, advanced 10% in US trading this week.
In Europe, shares of chip-tool bellwether ASML Holding NV have rallied 45% from their October low. The Dutch company this month touted strong demand for its cutting-edge machine both in the near and medium term, while seeing limited direct impact from the US curbs on chip exports.
European semiconductor stocks probably will start outperforming the broader market in this quarter, with the group poised for a recovery in 2023, Bank of America Corp. analysts said this week. They cited light positioning in the stocks, a likely bottoming in the smartphone market this quarter and in the broader semiconductor market in the second half of next year, and peaking inventories.
Falling Estimates
Of course, not everyone thinks the industry’s pain is over. Barclays Plc said Micron’s outlook shows demand isn’t improving as quickly as expected, especially when accounting for troubling signs of deterioration in industrial markets and slowing growth in cloud computing.
“The whole semi group has gotten over their skis with this move higher,” analysts Tom O’Malley and Blayne Curtis said.
Chip-industry profit estimates for 2023 have fallen more than 20 percentage points this year, a much bigger drop than the rest of the tech sector. Earnings for semiconductor companies in the S&P 500 are now projected to shrink 13% next year, according to the average of analyst estimates compiled by Bloomberg Intelligence.
The chip benchmark is now priced at less than 18 times projected earnings, around the average over the past 10 years.
“We believe there has been enough bad news,” Credit Suisse Group AG analysts wrote in a report this week. “Semiconductors are in a period of sustained long-term growth, with factors such as AI, cloud computing and automotive all driving growth that’s more diversified versus the past.”
Tech Chart of the Day
International Business Machines Corp. is a bright spot in tech this year, easily outperforming the overall sector as investors rotate into companies with consistent earnings and strong dividend yields. The stock has rallied six straight days, closing Thursday ats its highest since February 2020. IBM has returned 15% this year including dividends, compared with a 24% loss for the S&P 500 tech sector, with recent gains coming in the wake of strong results. On Thursday, IBM’s CEO said that unless there’s a “catastrophic recession,” corporate spending on technology should continue to increase.
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–With assistance from Subrat Patnaik, Henry Ren and Ryan Vlastelica.
(Updates to market open.)
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