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INTC and WDC: Will Weak Earnings Hurt Semiconductor Stocks?

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China is the root cause of all semiconductor problems

2018 started off on a strong note for the semiconductor industry, but this growth vanished in the second half of 2018 as the US-China (FXI) trade tensions weakened demand, especially in China. Demand for smartphones, PCs, and data center servers fell due to weakness in China, thereby impacting the semiconductor industry the most.

Apple (AAPL), TSMC (TSM), and Texas Instruments (TXN) expect to report higher than normal seasonal declines in the March 2019 quarter. The latest addition to the list is Intel (INTC) and Western Digital (WDC), both of which missed their revenue estimates and reported weaker-than-expected guidance for the March 2019 quarter on January 24.

All the above companies cited slowing demand in China as one of the primary causes for weak revenue. While the semiconductor companies protected themselves from tariffs, they could not protect themselves from slowing demand, which was an after-effect of the US-China trade war.

Semiconductor stocks

On January 24, semiconductor stocks rose on optimism from TXN’s, Lam Research’s (LRCX), and Xilinx’s (XLNX) earnings. The VanEck Vectors Semiconductor ETF (SMH) rose 5.89% on January 24 but then fell by 1% in the after-hours session on weak earnings from Intel. Intel’s stock fell 7.1% in the after-hours session after rising 3.8% in normal trading.

However, things were different for WDC. The stock rose 6.7% in the normal trading session on overall optimism. But in the after-hours session, the stock first fell 5% as the company’s fiscal 2019 second-quarter earnings missed analysts’ estimate and then rose 9.3% on its strong outlook for the second half of 2019. WDC’s optimistic outlook also sent Micron Technology (MU) stock up 1.66% in the after-hours trading session.

The January 25 trading session will show whether Intel will pull semiconductor stocks down or whether longer-term optimism from WDC will continue to push semiconductor stocks upward.

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