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Semiconductor Stock Plunge: Buy, Sell or Hold?

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This week has been a really bad one for semiconductor stocks, as first NVIDIA (NVDA - Free Report) and then Micron (MU - Free Report) announced that they were cutting their outlooks.

NVIDIA put down its miss versus projections (and it was a huge 17.3% miss) to softness in the gaming business, which it said was because of lower sales at channel partners affected by macroeconomic concerns. Worse, CEO Jenseng Huang warned: “As we expect the macroeconomic conditions affecting sell-through to continue, we took actions with our Gaming partners to adjust channel prices and inventory.”

What that boils down to then is slowing demand for discretionary items, as well as devices (PCs, smartphones, gaming devices, etc.). That could be first, because some of that spend has been diverted to services and the “opening up” economy, especially because people have bought a lot in the last 1-2 years and don’t need more of the devices right now. And second, because there really is a problem called inflation that despite all the stimulus cash, is beginning to hurt some customers.

This softening in demand could be a signal that the economy is going where the Fed intended. Only, as far as these fabless semiconductor companies are concerned, they are seeing increased costs because of supply chain issues and the Taiwan-China-US tension isn’t helping things at all.

If anything, there’s a lot of concern about the future of chip supply given Taiwan’s leading position there. Taiwan Semiconductor Company (TSM - Free Report) is seeing more demand than it can fill, and being a manufacturer, is in a position to keep raising prices. It’s customers, like NVIDIA are getting squeezed (seen from the more than 20 bps miss on the gross margin).    

It is not too much of a stretch to think that the softness in crypto is also affecting NVIDIA, as it is Advanced Micro Devices AMD. And like AMD, NVIDIA is saying that supply chain issues are leading to softer-than-expected growth in the data center, which is nevertheless still growing very strongly.

Micron followed soon after NVIDIA with an announcement of its own that macroeconomic conditions had materially deteriorated, leading to softening demand for its DRAM and NAND memory chips since its call on Jun 30. Additionally, it expects the adverse conditions to continue, posing significant challenges in the next two quarters. Capex is also being cut as a result.

Expectedly, the entire segment is in the red since then, with chipmakers including AMD, NVDA, QCOM, MU, TSM, AMAT, INTC all selling off.

A quick dip into Intel’s (INTC - Free Report) 14.5% sales miss in the last-reported quarter shows double-digit revenue misses across all segments except Network and Edge. Intel continues to bleed market share in the data center, accounting for the year-over-year decline and 24% miss versus analyst estimates in that segment.

Both desktop and notebook missed estimates because of the above-mentioned factors, although the accelerated computing and graphics product line surprised positively. All except Mobileye and All Other segments missed analysts’ profit estimates. Analysts expect both revenue and profits in the current quarter to come down slightly (on a year-over-year basis) in its most significant Client and Data Center segments.

Recommendations

As is probably obvious from the above discussion, the semiconductor segment is not a good place to put your money in right now. In case of companies like NVIDIA, Qualcomm, Micron and AMD, you will likely find a better entry point because things look to be headed down before they move up again. Intel is in a long-term bind and is not recommended any time in the near future. Therefore, selling Intel, Micron, AMD and NVDA instead sounds like a good plan.

There are a couple of stocks that stand out however.

TSM is one that benefits by virtue of being a low-cost manufacturer and despite all fabless players looking desperately to diversify their supply chains, these things take time. So in the meantime, TSM is the only hope for many, especially given its prowess at the leading edge.

Another stock that is usually a good defensive play is Texas Instruments (TXN - Free Report) . The fact that it has its own fabs and relatively low exposure to Asian manufacturing is an added advantage.

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