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A combination of high inventories and weak demand could be trouble for chip manufacturers.
Dreamstime
Semiconductor stocks have had a choppy year so far, battered by rising concerns over a possible recession and slowing consumer demand. And the decline is likely to “get worse before it gets better,” according to
Citi
group.
Analyst Christopher Danely predicts that semi stocks will fall by at least another 15% over the course of the year, driven down as Wall Street analysts lower their forecasts for profits during earnings season.
“We believe this will be the worst downturn in at least a decade in semiconductors because of three aspects that have not existed for ten years – excessive valuation, excessive inventory build, and a recession,” Danely wrote in a research note on Wednesday.
Semiconductor companies with high exposure to the personal computer and cellphone markets, such
Intel
(ticker:
INTC
) and
Advanced Micro Devices
(
AMD
), will be especially vulnerable, he said. Citi is predicting a 9% decline in PC units in 2022, saying the total smartphone market will also fall by that amount.
PCs and cellphones account for roughly 50% of all semiconductor demand, Danely said.
Neither company immediately responded to a request for comment.
A slowdown in consumer demand is, in itself, cause for concern. But coupled with excess inventories, the combination could prove disastrous for chip producers, Danely wrote. Many companies have boosted their inventories in response to supply-chain issues and labor shortages. Now that demand is slowing, companies may be forced to slash prices to get rid of those chips, he added.
While Danely is negative on the industry as a whole, he believes there are still some defensive stocks to be found. He prefers companies with increasing margins and earnings per share, such as
Micron Technology
(
MU
),
ON Semiconductor
(
ON
),
GlobalFoundries
(
GFS
), and Advanced Micro Devices. His top pick, however, is
Analog Devices
(
ADI
).
“We anticipate ADI’s [earnings per share] to be more sustainable compared to peers given the cost and revenue synergies from the Maxim acquisition,” he wrote.
Analog Devices completed its acquisition of rival Maxim Integrated last year. The stock was down 1.6% to $145.67 on Wednesday, and has declined 15.7% so far this year.
Most U.S. chip stocks were in the red on Wednesday, following the release of a higher-than-expected inflation figure. Consumer prices soared at a 9.1% annual pace in June, adding to expectations that the Federal Reserve will announce another steep interest-rate increases later this month and spooking investors away from high-growth tech companies.
The
S&P 500
was down 1.4%, while the
Dow Jones Industrial Average
lost 0.8% and the tech-heavy
Nasdaq Composite
fell 1.6%.
Write to Sabrina Escobar at [email protected]
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