Semiconductor stocks are rising and pulling stocks of manufacturers to the bottom

Investors are pulling out of semiconductor stocks, anticipating a slowdown in the industry as consumer demand slows and inventories build up at some of the world’s largest chip makers.

The sector exploded last year as people rushed to buy smartphones, cars and game consoles during the pandemic. Supply chain disruptions and delivery delays also contributed to the global chip shortage. At that time, many analysts and semiconductor manufacturers predicted that the demand for chips would exceed supply for a long period, and chip factories increased production.

Now sales of smartphones and personal computers are declining as rising food and energy prices this year hurt consumer spending in the US and elsewhere. At the same time, quarantine in China due to Covid is also putting pressure on consumer demand for expensive goods. At the same time, rapidly rising interest rates are threatening to undermine economic growth in the US and around the world, forcing businesses to be cautious about spending.

In recent months, the memory chips used in many electronic devices have become cheaper. While semiconductors used in cars and data centers are still in high demand, some companies are bracing for slowdowns in other areas.

Leaders lose value

Shares of the world’s largest contract chip manufacturer Taiwan Semiconductor Manufacturing Co. over the past six months have fallen by 22% after hitting an all-time high in January. Last week, the company raised its full-year earnings guidance and noted continued strong demand for chips used in products such as high-performance computers.

However, a TSMC top executive acknowledged that the industry as a whole is going through a “stock correction” that has caused customers to cut orders from some of its peers.

After two years of increased demand amid the pandemic, “we expect it will take several quarters to balance excess inventory in the semiconductor supply chain and ensure healthier inventory levels,” said CEO C.C. Wei during a conference call last week.

According to FactSet, TSMC shares are now trading at 13.4x of expected earnings over the next 12 months, compared to a forward price-to-earnings ratio of over 23x in early January.

Shares of the South Korean company Samsung Electronics Co., the world’s largest manufacturer of memory chips, as well as SK Hynix Inc. also fell, although the recent rally in global tech stocks helped the sector recoup some losses. American semiconductor giant Intel Corp. lost 22% in six months, while Micron Technology Inc., which posted weak revenue guidance last month, is down 23%.

Semiconductors are an integral component of a wide range of products, from household appliances to medical equipment and automobiles. In addition, making a chip—with transistors that are much thinner than a human hair—is a complex process, and the lead time between placing an order and shipping the chip typically takes several months. Longer lead times can lead to a large buildup of orders. Semiconductor factories also take several years to build.

Booms and busts

The chip industry has long been going through a boom and bust cycle that investors are familiar with. When prices rise due to strong demand, manufacturers ramp up capacity to take advantage of high prices and increase chip production. As a result, this leads to an oversupply. Prices then fall along with income and production levels. The cycle is repeated.

Some companies have recently reported an increase in semiconductor inventories. According to Felix Lee, a stock analyst at Morningstar Inc., in some cases, chips are stored for three to four months, which is longer than usual.

“Certainly, excess inventory will raise concerns about lower demand going forward as customers may have to cut some orders,” he said.

This is necessary to adjust inventory levels. He expects excess stocks of chips to remain until the end of the year before the situation returns to normal.

Elizabeth Quick, director of Asian equities at British fund Abrdn, said the interest rate hike also forced investors to withdraw money from growth stocks, which include stocks of chip makers. While some semiconductor stocks have recently rebounded from lows, she said there are still signs of declining demand, with earnings likely to be revised down.

“It may be some time before things start to change,” Quick added.

She believes that the recovery in consumer demand could be affected by how well China handles Covid outbreaks in the coming months. China’s mobile phone shipments rose 9.2% year-on-year in June after lockdowns and restrictions began to be lifted, according to official data. In the first half of the year, they decreased by 22% compared to the same period in 2021.

William Yuen, director of investment for Invesco, Hong Kong, noted that inflationary pressures have intensified after the military conflict between Russia and Ukraine triggered a sharp rise in prices for energy, agricultural products and raw materials.

Many semiconductor stocks continue to be attractive to long-term investors, he said, as demand for chips from consumers and businesses will continue to rise in the long term.

“Most sectors and industries that are subject to short-term cycles are not going through the best period right now, but then good times will come again,” Yuen added.

Prepared by Profinance.ru by materials editions of The Wall Street Journal

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