Semiconductor-makers have faced a tough environment in 2019: high growth expectations have come up against the trade-war and economic-slowdown headwinds. But after these stocks plummeted late last year on those concerns, they have rebounded to outperform the market in year to date. Where the sector goes next is a subject of disagreement on Wall Street.
The back story. Semiconductor and semiconductor-equipment makers belong to an inherently cyclical industry that sees periodic episodes of booming growth followed by inventory corrections—the current situation. After strong industrywide sales growth of 8% in 2018 excluding memory, the sector is on track for a 6% drop this year.
The U.S.-China trade war has extended the current downturn. Most major semi players have been caught in the middle of the conflict, with supply chains and customers on both sides of the Pacific.
The iShares PHLX Semiconductor ETF (SOXX)—which tracks an index of U.S. semiconductor companies—tumbled a steep 18% in the second half of 2018 through Christmas Eve, after dividends, versus a 12% loss for the broader S&P 500 (.SPX).
But so far this year, investors have been willing to give semiconductor stocks another chance. Wall Street estimates for chip company earnings came down, managements reset their forward guidance, and the stocks have still bounced back. The semiconductor index has returned over 32% this year versus 17.5% for the S&P 500.
What’s new. JPMorgan analyst Harlan Sur sees that outperformance continuing through the second half of 2019 as both supply and demand sides of the equation improve for semiconductor companies.
“We remain confident in a [second-half] pickup in overall demand with near seasonal demand in PC computing, wireless/wired infrastructure (around 5G), aerospace/defense, smartphones (ex-Huawei), consumer/gaming, and a resumption in cloud/hyperscale spending trends,” Sur wrote in a report on Wednesday morning.
The end of the year is a seasonally strong period for orders of chips used in PCs, smartphones, and gaming consoles, according to Sur. Ongoing 5G deployment in the U.S. and abroad will boost demand for wireless infrastructure products. He also expects data center capital expenditures to increase by as much as 30% over the first half of 2019, powered by big spending from the likes of Alphabet (GOOGL), Facebook (FB), and Microsoft (MSFT) on artificial intelligence and cloud chips.
Others see a hazier near-term picture for semiconductor stocks. Nomura Instinet analyst David Wong noted in a report published Tuesday that total global semiconductor sales have declined at least 15% year over year in May, June, and July. Recently issued forward guidance from several chip companies implies continued sales declines in the fall, he added.
“With the continuing U.S. restrictions on shipments to Huawei and rising tariffs on Chinese goods into the U.S., we think the chance of a meaningful recovery in chip end-market demand in 2019 is unlikely,” Wong wrote. “Our projections assume [year-over-year] declines in global chip sales in every month through the rest of this year.”
For the full year 2019, Wong projects a 15% decline in semiconductor sales.
Sur also acknowledges that the U.S.-China trade war, global economic data, and restrictions on doing business with Huawei could all be sources of volatility for semiconductor sector stocks.
Looking ahead. J.P. Morgan’s Sur recommends buying diversified semiconductor companies exposed to growth in datacenter, automotive, and industrial products. He has Overweight ratings on Broadcom (AVGO), Intel (INTC), Nvidia (NVDA), Micron Technology (MU), Marvell Technology Group (MRVL), Texas Instruments (TXN), Inphi (IPHI), and KLA (KLAC).
Nomura’s Wong, meanwhile, is largely neutral on the sector, including Nvidia, Micron, Texas Instruments, Xilinx (XLNX), Applied Materials (AMAT), and Analog Devices (ADI). He rates Intel and Advanced Micro Devices (AMD) stocks as Buy.
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