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Yesterday was a good day for chip stocks on the whole, as investors cheered the report from Susquehanna Financial Group analyst Christopher Rolland, which said that “the acute portion of the semiconductor downcycle for the handset, PC and consumer end markets has passed.” The analyst upgraded Intel (INTC - Free Report) to Neutral, and Qualcomm and Skyworks to Positive.
Chip stocks rallied on the possibility of an early exit from the inventory glut situation with Intel advancing 10.8% for the week so far. Other chip stocks with exposure to the PC, handset and consumer markets also soared. Advanced Micro Devices (AMD - Free Report) jumped 16.8%, NVIDIA Corp (NVDA - Free Report) jumped 11.2%, ASML Holding 4.9% and Qualcomm 4.6%. Even memory maker Micron and foundries TSM and UMC were up. The iShares Semiconductor ETF (SOXX - Free Report) was up 3.9%.
The past year has not been a great one for the segment as supply chain issues, slowing demand and a shutdown in the Chinese market contributed to an inventory glut. It all happened rather quickly toward the middle of the year and a number of companies had to quickly pull back production. The pandemic-led expansion of the market notwithstanding and possibly because of the imbalance in production and consumption between the various end markets, analysts were rapidly cutting estimates for the rest of the year and also for 2023.
Fourth quarter results and 2023 outlooks from the leading players further added to this story.
Intel’s commentary was perhaps the most disappointing. CEO Pat Gelsinger said, “We expect some of the largest inventory corrections literally that we’ve ever seen in the industry taking place that’s affecting the Q1 guide in a meaningful way.” The company expects to burn cash in the current quarter although its share losses are expected to “stabilize” this year.
AMD, which has actually done pretty well as it picked up share from Intel on the strength of its advanced chips, also didn’t paint an attractive picture. Management guidance for the first quarter was a 10% decline in revenue and relatively weak gross margin.
TSM’s revenue guidance for the first quarter was flat to down from last year, so the world’s leading foundry was also expecting the softness to continue.
NVIDIA said that the post pandemic slump in gaming appears to be over with “gamers enthusiastically embracing the new Ada architecture GPUs with AI neural rendering.” "AI is at an inflection point, setting up for broad adoption reaching into every industry,” said NVIDIA’s founder CEO Jensen Huang. He also said that there was increased interest in its AI tech from startups to major enterprises and that the company was “set to help customers take advantage of breakthroughs in generative AI and large language models.” The company recently raised its guidance by a sliver, which while still a significant reduction from last year, is much stronger than what it has managed in the last two quarters.
Micron expects to see improvements in the second half of the year. “We expect improving customer inventories to enable higher revenue in the fiscal second half, and to deliver strong profitability once we get past this downturn.” Therefore, the memory side of things is improving.
While company guidance serves as a pointer, it may not be conclusive simply because some managements tend to be conservative and set easily attainable targets, while others are less so. Therefore, independent/market research becomes relevant.
In this case, IDC has provided estimates, which don’t look very optimistic. The firm is looking for an 11.2% decline in PC and tablet shipments this year. “2023 will be a time for inventory clearing and shifting priorities” and commercial PC refreshes may be expected in 2024 and 2025 because of the end of support for Windows 10.
Gartner expects worldwide shipments of total devices (PCs, tablets and mobile phones) to decline 4.4% in 2023 compared to an 11.9% decline in 2022, mainly because of continued inflationary pressures. It predicted in July last year that chip sales would decline 2.5% in 2023.
Additionally, a recent World Semiconductor Trade Statistics Organization (WSTS) industry forecast — endorsed by Semiconductor Industry Association — projects annual global sales of semiconductors will decrease 4.1% in 2023.
Conclusion
Considering the above, it appears that 2023 won’t be a very easy year for chip stocks and there will most certainly be further inventory corrections as we move through the year. But if there isn’t a recession or a notable economic downturn, there should be a recovery by year end. Therefore, while I continue to believe that semiconductor investments are a necessity for the long term, it would be best to tread with caution this year.
Recommendations
Despite the concerns, there are still a couple of opportunities, based on their estimate revisions trend and growth outlook:
Impinj, Inc. (PI - Free Report) : Revenue and earnings are expected to grow a respective 40.2% and 65.6% this year followed by a respective 19.6% and 26.0% growth in the next. In the last 60 days, the 2023 estimate is up 27 cents (20.5%) while the 2024 estimate is up 26 cents (14.9%).
Lattice Semiconductor Corp. (LSCC - Free Report) : revenue and earnings are expected to grow 12.3% and 18.3%, respectively in 2023. Next year, revenue will grow 11.9% and earnings 16.8%. The 2023 estimate is up a couple of cents in the last 30 days. The 2024 estimate is up 11 cents (4.8%).
Performance Over Past Week
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Chip Stocks Are Advancing. Should You Jump In?
Yesterday was a good day for chip stocks on the whole, as investors cheered the report from Susquehanna Financial Group analyst Christopher Rolland, which said that “the acute portion of the semiconductor downcycle for the handset, PC and consumer end markets has passed.” The analyst upgraded Intel (INTC - Free Report) to Neutral, and Qualcomm and Skyworks to Positive.
Chip stocks rallied on the possibility of an early exit from the inventory glut situation with Intel advancing 10.8% for the week so far. Other chip stocks with exposure to the PC, handset and consumer markets also soared. Advanced Micro Devices (AMD - Free Report) jumped 16.8%, NVIDIA Corp (NVDA - Free Report) jumped 11.2%, ASML Holding 4.9% and Qualcomm 4.6%. Even memory maker Micron and foundries TSM and UMC were up. The iShares Semiconductor ETF (SOXX - Free Report) was up 3.9%.
The past year has not been a great one for the segment as supply chain issues, slowing demand and a shutdown in the Chinese market contributed to an inventory glut. It all happened rather quickly toward the middle of the year and a number of companies had to quickly pull back production. The pandemic-led expansion of the market notwithstanding and possibly because of the imbalance in production and consumption between the various end markets, analysts were rapidly cutting estimates for the rest of the year and also for 2023.
Fourth quarter results and 2023 outlooks from the leading players further added to this story.
Intel’s commentary was perhaps the most disappointing. CEO Pat Gelsinger said, “We expect some of the largest inventory corrections literally that we’ve ever seen in the industry taking place that’s affecting the Q1 guide in a meaningful way.” The company expects to burn cash in the current quarter although its share losses are expected to “stabilize” this year.
AMD, which has actually done pretty well as it picked up share from Intel on the strength of its advanced chips, also didn’t paint an attractive picture. Management guidance for the first quarter was a 10% decline in revenue and relatively weak gross margin.
TSM’s revenue guidance for the first quarter was flat to down from last year, so the world’s leading foundry was also expecting the softness to continue.
NVIDIA said that the post pandemic slump in gaming appears to be over with “gamers enthusiastically embracing the new Ada architecture GPUs with AI neural rendering.” "AI is at an inflection point, setting up for broad adoption reaching into every industry,” said NVIDIA’s founder CEO Jensen Huang. He also said that there was increased interest in its AI tech from startups to major enterprises and that the company was “set to help customers take advantage of breakthroughs in generative AI and large language models.” The company recently raised its guidance by a sliver, which while still a significant reduction from last year, is much stronger than what it has managed in the last two quarters.
Micron expects to see improvements in the second half of the year. “We expect improving customer inventories to enable higher revenue in the fiscal second half, and to deliver strong profitability once we get past this downturn.” Therefore, the memory side of things is improving.
While company guidance serves as a pointer, it may not be conclusive simply because some managements tend to be conservative and set easily attainable targets, while others are less so. Therefore, independent/market research becomes relevant.
In this case, IDC has provided estimates, which don’t look very optimistic. The firm is looking for an 11.2% decline in PC and tablet shipments this year. “2023 will be a time for inventory clearing and shifting priorities” and commercial PC refreshes may be expected in 2024 and 2025 because of the end of support for Windows 10.
Gartner expects worldwide shipments of total devices (PCs, tablets and mobile phones) to decline 4.4% in 2023 compared to an 11.9% decline in 2022, mainly because of continued inflationary pressures. It predicted in July last year that chip sales would decline 2.5% in 2023.
Additionally, a recent World Semiconductor Trade Statistics Organization (WSTS) industry forecast — endorsed by Semiconductor Industry Association — projects annual global sales of semiconductors will decrease 4.1% in 2023.
Conclusion
Considering the above, it appears that 2023 won’t be a very easy year for chip stocks and there will most certainly be further inventory corrections as we move through the year. But if there isn’t a recession or a notable economic downturn, there should be a recovery by year end. Therefore, while I continue to believe that semiconductor investments are a necessity for the long term, it would be best to tread with caution this year.
Recommendations
Despite the concerns, there are still a couple of opportunities, based on their estimate revisions trend and growth outlook:
Impinj, Inc. (PI - Free Report) : Revenue and earnings are expected to grow a respective 40.2% and 65.6% this year followed by a respective 19.6% and 26.0% growth in the next. In the last 60 days, the 2023 estimate is up 27 cents (20.5%) while the 2024 estimate is up 26 cents (14.9%).
Lattice Semiconductor Corp. (LSCC - Free Report) : revenue and earnings are expected to grow 12.3% and 18.3%, respectively in 2023. Next year, revenue will grow 11.9% and earnings 16.8%. The 2023 estimate is up a couple of cents in the last 30 days. The 2024 estimate is up 11 cents (4.8%).
Performance Over Past Week
Image Source: Zacks Investment Research