Is the semiconductor growth cycle nearing its end?
The first semiconductor earnings season of 2018 has shown that the two-year growth trend in the industry may be coming to an end. The semiconductor industry had some unpleasant surprises in 1Q18, which got investors and analysts concerned about short-term growth.
The news of trade tensions between the United States and China has made the technology sector vary. Semiconductor stocks, in particular, took the biggest hit from the growing trade tensions. All major semiconductor companies stated that a potential trade war between the two countries could impact their earnings, as the two nations are the largest semiconductor markets.
Some US companies have already started to feel the tremors of a potential trade war. Qualcomm stated that a sales ban on ZTE imposed by the United States could lower its EPS (earnings per share) by $0.03 in 2Q18.
Semiconductor stocks react to earnings
The earnings season started with Lam Research (LRCX) and TSMC (TSM) reporting weak guidance for 2Q18. This news sent the PHLX Semiconductor Sector ETF (SOXX) down 8.5% between April 18 and 25, 2018. Major stocks Intel (INTC), Qualcomm (QCOM), and Texas Instruments (TXN) fell 4.2%, 9.9%, and 6.9%, respectively.
However, the three companies’ stocks revived a little after they released their 1Q18 earnings, which beat analysts’ estimates. What caught investors’ attention wasn’t their earnings but their guidances for 2Q18, which reflected concerns about future growth.
After falling 9.9% and 6.9%, respectively, the stocks of Qualcomm and Texas Instruments rose 1.5% and 4.7%, respectively, following their earnings releases because they reported guidances that beat analysts’ estimates. Even strong earnings guidance didn’t completely revive the stocks from their earlier fall because investors are still concerned about the tension between the United States and China. In the case of Intel, its stock was flat because its EPS guidance failed to meet analysts’ expectations. As analysts’ estimates pour in following earnings releases, the three stocks may revive.
The guidance shows that short-term growth is positive but might be affected by US-Chinese trade tensions. However, the long-term growth coming from AI (artificial intelligence) and 5G (fifth-generation) technology remains unaffected. A Benzinga article stated that UBS analyst Timothy Arcuri believes that the AI and 5G revolution will continue to “push more silicon into every vertical of the economy.” Investors may want to take advantage of the potential short-term weakness in the semiconductor industry and buy stocks with strong long-term growth potentials in the 5G and AI spaces.
In this series, we’ll analyze at three major semiconductor stocks—Intel, Qualcomm, and Texas Instruments—and understand their growth potentials in both the short term and the long term.
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