Chip Stocks Are in a Perfect Storm — Time to Sell or Buy?

American chipmakers have been in a perfect storm lately. It is formed by several headwinds such as downturns in PC sales and higher interest rates.

Declines in PC sales lead to lower demand for semiconductors and thus lower revenues for the semiconductor industry. For example, AMD has seen significant revenue and profit losses due to declines in PC sales. analyst Sam Boughedda sees the decline in PC sales worsening as the US economy heads into recession. “If we assess current online demand trends, we see that PC-related searches continue to decline steadily,” he said International business hours in an email.

Higher interest rates make semiconductor companies’ future earnings less valuable when discounted to the present day. “This is the main sentiment worrying high growth sectors, including technology,” Kunal Sawhney, founder and chief executive officer of Kalkine, an independent equity research firm, told IBT. “And it has little to do with microeconomic elements like demand for a particular product or brand.”

But there is another headwind: the strong dollar. It pounded overseas sales, another blow to the bottom line of chipmakers with significant overseas sales.

“A strong dollar will undoubtedly weigh on US technology stocks as entrants in this category are large exporters, and as the USD rises, these companies’ global earnings in USD will fall,” added Sawhney.

In a recent poll, FactSet found that 50% of S&P 500 member companies expect earnings to fall due to the stronger dollar.

“Given the strengthening of the US dollar in recent months (as indicated by the rise in the US Dollar Index) and the 40% international earnings drag on the S&P 500 overall, it is not surprising that the number of (early reporting) Companies reporting adverse impacts on earnings, sales or profit margins due to unfavorable exchange rates,” noted John Butters, vice president and senior analyst at FactSet, in a post on the company’s blog.

Still, there’s another headwind: the US ban on certain chip sales to China. It adds to the woes of chipmakers.

Wall Street has noticed all of these headwinds, which have pushed the PHLX semiconductor index down 42% for the year.

Does this mean that the markets have already factored in all the bad news? Unfortunately, it’s hard to say since no one has a crystal bowl to see into the future.

However, the perfect storm may not last forever. For example, the US dollar could lose ground if the US economy goes into a severe recession. Additionally, the ban on semiconductor sales to China could be lifted once the US elections are over or the Russo-Ukrainian war abates.

In any case, investing in semiconductor stocks is becoming more attractive again for value investors, as the sector has strong “moats”, i.e. barriers to entry. They enable semiconductor companies to deliver superior returns to their equity owners.

Nevertheless, Sawhney currently sees no urgency for “bottom fishing”. “Even if one thinks they are cautiously bottom fishing, stock valuations could remain at the same level over the medium term, reducing any chance of near-term windfall capital gains,” he said.

Disclosure: The author owns semiconductor stocks.

Related Articles Chip Stocks Are in a Perfect Storm — Time to Sell or Buy?

Fry Electronics Team

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