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Weak Microchip (MCHP) Guidance Spurs Semiconductor ETF Sell-Off

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The semiconductor space has been the sweet spot in the overall technology space this year. About 57.8% of technology earnings growth came from semiconductor electronics (with 80% beating earnings), followed by 31.8% growth in miscellaneous technology. Q2 earnings were robust for some of the giants in the space including Intel (INTC), Micron Technology (MU), Broadcom (BRCM) and Texas Instruments (TXN) (read: 3 Overlooked Funds Beating the SPDR Tech ETF (XLK) This Year).

However, the golden days for semiconductors seem to be passing by as Microchip Technology Inc. (MCHP) came up with a downbeat second-quarter fiscal 2015 preliminary net sales report on October 9. The off-hand top-line numbers had an extremely adverse effect on the share price, which fell about 12.3% as of October 10 (read: Semiconductor ETFs on Roller Coaster Ride after Earnings Beat).

Microchip expects net sales of $546.2 million for the second quarter ending September 30, 2014 which takes into account nearly $16.9 million from the latest ISSC acquisition. Weaker-than-expected sales in China were indicated for the lowered revenue expectation. China has been witnessing industrial slowdown for quite some time and this is starting to trickle through into the space.

To add to the woes, the company  indicated that September is a busy business month, especially in China. But management cited that sales failed to live up to its expectation. Not only this, management cautioned of yet another industry correction that has started and will spread broadly over the near future.

Market Impact

The very comment spurred investors to sell their semiconductor holdings as soon as they could. As of October 10, INTC was down 5.1%, MU was down 9.3%, BRCM lost about 5.5% and TXN has retreated about 7.1%.  

The same vibes were prevalent in the ETF industry as well with every semiconductor ETF literally bleeding though Microchip did not have its presence in any semiconductor ETF directly. MCHP has only 0.83% exposure in WisdomTree MidCap Dividend ETF (DON) which was down about 1.1% on October 10 (read: 2 ETFs Hitting Billion Dollar AUM Mark in May).

iShares PHLX SOX Semiconductor Sector ETF (SOXX - Free Report) – the biggest semiconductor ETF – lost about 6.9% on October 10. Market Vectors Semiconductor ETF (SMH) has shed over 6.6% while SPDR S&P Semiconductor ETF (XSD) plunged 7.9% and Dynamic Semiconductors ETF (PSI) fell about 8%.

Bottom Line

Semiconductors had to go through such brutality as the space became arguably overvalued. XSD is presently trading at a P/E (ttm) of 25 times while the ratio for PSI stands at 20 as of October 10. This goes against the biggest U.S. ETF SPDR S&P 500 ETF’s (SPY) P/E of 17 times which itself does not call for a cheap valuation.

Though we had a bullish view on most of the semiconductor ETFs as most of the products carry top ranks (though with High risk outlook), we believe the downtrend for this overvalued space will stay for some time. Investors should note that the upcoming quarter is seasonally soft which poses another round of threat to these stocks.

Thus, at present it may be better to hold off semiconductor ETFs. Everything depends on the earnings results of the other companies which will make or break the fate of the space for the next season.

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