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Industry Spotlight

Is the rally in semiconductor stocks justified?

Macroeconomic and political uncertainty, along with trade tensions and weakening global auto demand have led Europe’s largest chipmaker Infineon Technologies [IFX.DE] to forecast a 7% decline in Q1 2020 revenue growth. CEO Reinhard Ploss said Infineon does not “expect markets to recover before the second half of the fiscal year [ended 30 September 2020]”. Infineon stock has been on a tear since the start of October, and the share price is up over 13% year-to-date.


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However, this does not seem to have dented sentiment towards semiconductor stocks, which are having a good year so far – this week hasn’t shown any signs of this letting up. Infineon’s share price popped 6.2% on Tuesday – its biggest percentage gain in 11 months according to Reuters – after it reported a 6% year-over-year rise in fourth-quarter revenue.

Shares in UK chip specialist Dialog Semiconductor [DLG.DE] and Netherlands-based ASM International [ASM.AS] were also up 6.7% and 1.8% respectively on Tuesday.

Both companies had recently announced positive news for investors. Dialog, a supplier to Apple [AAPL], increased its long-term financial targets on Monday and ASM International posted a €100m share buyback at the start of the month. 

The semiconductor sector is highly competitive, with more than 750 companies producing the technologies underpinnings of all types of devices globally, according to Investor’s Business Daily. The stock price gains recorded by certain chip giants such as Intel [INTC], Qualcomm [QCOM] and Taiwan Semiconductor [TSM] – up 27%, 64% and 47% YTD (through 12 November) respectively – have stood out for the sector.

Looking at the sector as a whole, the S&P Semiconductor ETF has surged more than 55% and the iShares PHLX Semiconductor fund is up 51.6% YTD (through Tuesday 11 November). This is nearly twice the 23.3% gains the S&P 500 recorded in the same period.



Are semiconductor stocks in bubble territory?

For BCA analysts, the sector’s current sky-high valuations are looking a bit inflated off the back of positive trade developments, MarketWatch reports.

“We warn that the S&P semi equipment all-time highs look more like a mania, eerily similar to the dotcom bubble era,” BCA analysts said.

“We warn that the S&P semi equipment all-time highs look more like a mania, eerily similar to the dotcom bubble era” - BCA analysts


“Relative forward profits are way behind relative share prices as investors have extrapolated the recent positive trade news far into the future,” the analysts stated, pointing foreign sales exposure of 90%, including 30% of sales originating from China. The lofty valuations are “unwarranted and bound to return to earth”, considering the US manufacturing sector is in its third month of contraction.

“While bulls would buy this breakout, we are sticking our necks out and recommend selling into strength,” they added.


Fresh trade talk optimism set to boost semiconductor stocks

In August, trade group World Semiconductor Trade Statistics said it expected demand for semiconductor products to decline by 13.3% in 2019, but said it expected a return to growth in 2020.


Expected decline for semiconductor products in 2019


What could be a major catalyst for growth in the sector is any signs of optimistic progress on a preliminary trade deal between the US and China – two countries that rely heavily on one another’s resources when it comes to manufacturing semiconductors.

As it stands, both countries have agreed to remove some existing tariffs, and phase out more as talks progress. This has prompted a sigh of relief for those dealing in semiconductor stocks.

Chipmakers are poised for growth, as the advent of 5G, cloud computing, electric cars and AI have all given the space a boost, according to ZacksInvestment Research.

The firm ranks Power Integrations [POWI] and Advanced Energy Industries [AEIS] as top buys, with Akoustis Technologies [AKTS], Intel and Inphi [IPHI] rated as buys.

Analyst Nigam Arora, writing in MarketWatch also highlights positive money flows in popular stocks such as Intel, AMD [AMD], Applied Materials [AMAT] and Nvidia [NVDA] as an early indicator of upward momentum in the short-term.

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The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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