Chip stocks could sink another 25% as ‘we enter worst semiconductor recession in decade’, analyst says

After a rough few months for semiconductor stocks, one Wall Street analyst expects the pain to continue and predicted on Tuesday that “we are entering the worst semiconductor downturn in a decade.”

In a note on Tuesday, Citi Research analyst Christopher Danley wrote that this earnings season was the first since the start of the pandemic that consensus estimates for the chip sector fell during earnings. While many analysts blamed a significant decline in PC and smartphone sales amid the specter of recession, they pointed to the continued strength of the automotive and industrial sectors as reasons for optimism.

However, Danley did not see the same positives, saying he believed strong sectors showed signs of future weakness.

“We’re also seeing the first signs of a correction in the automotive and industrial end markets, and we continue to believe we’re entering the worst semiconductor downturn in a decade given the slowdown and inventory build-up,” Citi Research analyst Christopher Danley said in a note. citing order cancellations from auto and industrial companies that Micron Technology Inc. executives MU,
-1.25%
and Analog Devices Inc. ADI,
-1.59%
revealed in recent weeks.

Reading: Dell sees PC sales fall worse than estimates, shares record second-worst day since Wall Street comeback

“We expect more companies to announce cancellations from automotive/industrial end markets as capacity is added and demand weakens,” Danley said.

Companies that specialize in making cars and industrial chips have fared better — their shares haven’t fallen as much — overall this year, as chip demand has continued in those industries whose supply chains have been hit hardest by the COVID-19 pandemic. 19. Danley expects they will, creating another leg down for chip stocks.

“We maintain our belief that each company/end market will correct and expect the SOX index to hit new lows and fall another 25%,” Danley said.

Danley’s is listed on the PHLX Semiconductor Index SOX,
-1.31%,
which is already on track to post its worst decline in 14 years. For the year, the index is down 32% and, if unchanged, would be the index’s worst decline since 2008, when it fell 48% over the year.

Another 25% drop from its current level of around 2,700 would put the SOX at around 2,020, a low not seen since July 7, 2020, when it closed at 2,019. The SOX last closed at a record high on Dec. 27, when it ended at 4,039.51, according to FactSet data.

Semiconductor designers focused on the automotive and industrial sectors include Texas Instruments Inc. TXN,
-0.71%,
which has a large presence in automotive chip sales and recently reported an outlook that beat Wall Street estimates at the time, as well as Analog Devices and ON Semiconductor Corp. ON,
-0.79%
Outside the US, major automotive suppliers include Netherlands-based NXP Semiconductors NV NXPI,
-0.10%,
Japan’s Renesas Electronics Corp. 6723,
+0.23%
and Murata Manufacturing Co. 6981,
-0.52%,
and the German Infineon Technologies AG IFX,
+2.68%

The most SOX-hit stocks this year include Nvidia Corp. NVDA,
-2.11%,
which was down 48% for the year, and Marvell Technology Inc. MRVL,
-2.02%,
45% drop. Among the major chipmakers, Advanced Micro Devices Inc. AMD,
-1.75%
likely outperformed the lighter with a slightly understated forecast while Intel Corp’s INTC.
-2.06%
the report was a mess.

For more on this year’s stock moves: Chip stocks rose as pandemic demand for electronics fell, but there were still some winners

Danley’s top pick among chip companies is Analog Devices, and he wrote Tuesday that his favorite stocks coming out of the recession are Micron, AMD, ON Semiconductor Corp. ON,
-0.79%,
and GlobalFoundries Inc. gfs,
+3.51%.
Two of Danley’s favorite stocks fall squarely into the automotive and industrials category: Analog Devices and ON Semi.

On Tuesday, the SOX index fell as much as 2.4% and finally checked near those session lows. By comparison, the S&P 500 SPX,
-1.10%
the tech-heavy Nasdaq Composite Index COMP also fell 1.4%,
-1.12%
decreased by 1.8%.

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