Almost no inventory is spared as the semiconductor street spreads

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(Bloomberg) — Computer sales are faltering, short sellers are increasing bets on semiconductor stocks and the U.S. is tightening export restrictions. For chip investors, the outlook is getting darker.

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After rallying in July with the rest of technology, shares of semiconductor companies are falling again amid a steady stream of warnings of falling demand. Philadelphia’s semiconductor index fell nearly 10% in August, roughly double the loss for the tech-heavy Nasdaq 100. And high-flyers such as Nvidia Corp. they are back to flirting with the lows they hit two months ago.

With the Federal Reserve showing little sign of letting up on rate hikes, some on Wall Street predict the pain is just beginning as chip makers are forced to rein in production after years of booming. Analysts at Citigroup Inc. said this week they expected a further 25% decline in the semiconductor index, with the slowdown in demand spreading from personal computers and headsets to cars and industrial products.

“I think we’ll continue to see headwinds into the fall,” said Michael Matousek, chief trader at US Global Investors. “We may not see a turn in the cycle until the Fed starts cutting interest rates, or at least holding them steady.”

The chip index is down 34% since its record close on Dec. 27, with 29 of the benchmark’s 30 stocks falling in that time. Nvidia is the worst performer, losing more than half its value. Wolfspeed Inc., a maker of automotive and industrial chips, is the lone gainer, retaining a fractional 1 percent advance.

Seagate Technology Holdings Plc became the latest to sound the alarm on Wednesday. The biggest maker of computer hard drives cut its revenue forecast for the current quarter, citing worsening economic trends and “cautious buying behavior” from businesses around the world and cloud customers in the US. Dell Technologies Inc. last week it gave a pessimistic outlook for the second half, warning of “more cautious customer behaviour”.

Meanwhile, Nvidia pared some premarket losses on Thursday after it said it had received licenses to provide support to US customers in China for its artificial intelligence chips, a day after it revealed it needed Washington’s approval to to sell certain products to customers based in China;

The pain should come as no surprise to Wall Street analysts, who have cut earnings estimates for the industry for most of the year. Forecasts for 2023 earnings growth for semiconductor-related companies in the S&P 500 have fallen 10 percentage points since January, compared with a decline of about 6 points for the broader technology sector.

The gloom is welcome news for short sellers, who have added to bets against semiconductor stocks in recent months. Since the start of the third quarter, short interest in the US information technology sector has increased by $3.4 billion, and about 80% of that increase is concentrated in chipmakers and equipment companies, according to data from S3 Partners.

Of course, there’s a case to be made that much of the bad news has already been priced into semiconductor stocks, which are nearing levels that have historically represented good buying opportunities. Priced at 15 times projected earnings, the semiconductor index is below its average valuation over the past decade, according to data compiled by Bloomberg. Micron Technology Inc. and Qualcomm Inc. they are among the cheapest, trading around 10 times.

Those multiples may not be as cheap as they seem, given that earnings estimates are still falling. Citigroup analysts Christopher Danely and Kelsey Chia see the industry “entering the worst semiconductor downturn in a decade, given the slowdown and inventory build-up.”

“We maintain our belief that each company/end market will correct and expect the SOX index to reach new lows,” they wrote in a research note.

Technical chart of the day

Citi analysts noted that estimates were cut during the second-quarter earnings season for the first time since the pandemic. A 25% drop in the semiconductor index would wipe out all the gains made during the pandemic. The SOX has fallen 32% this year through Wednesday’s close, its biggest annual decline since 2008.

Top tech stories

  • Arm Ltd. sued Qualcomm for breach of contract and trademark infringement, setting up a legal showdown between the SoftBank Group Corp-owned chip company and one of its biggest customers.

  • Nvidia retreated in premarket trading after warning that new rules governing the export of artificial intelligence chips to China could affect hundreds of millions of dollars in revenue.

  • Tencent Holdings Ltd. has set a modest target of divesting about 100 billion yuan ($14.5 billion) of its listed equity portfolio this year as it shifts strategy, the Financial Times said, citing two unidentified people familiar with the matter.

  • Rogers Communications Inc. succeeded in extending the deadline for a $9.33 billion bond buyback, overcoming objections from some investors over the terms of the deal.

  • Lazada Group of Alibaba Group Holding Ltd. is preparing to make its maiden foray into Europe, using its success in Southeast Asia to take on rivals such as Amazon.com Inc. and Zalando SE in one of the largest online shopping markets.

  • The founder of Taiwanese chipmaker United Microelectronics Corp. outlined plans to fund military training for millions of “civilian warriors” in Taiwan to fight any potential Chinese invasion.

  • Carro, one of Southeast Asia’s largest online marketplaces for used cars, raised nearly S$200 million ($143 million) in debt funding this year as international start-ups vie for increasingly scarce venture capital.

  • Uber Technologies Inc. will work with an affordable tech startup to increase the number of electric vehicles in London by an extra 10,000 over the next few years, according to a statement.

(Updates with Nvidia’s announcement in paragraph 7.)

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