Semiconductor earnings and Applied Materials
In this semiconductor earnings season, many semiconductor companies with high exposure to China (FXI) missed expectations, as the US-China trade war weakened demand in Asian countries. The slowing demand encouraged many chip companies, especially memory chipmakers, to cut their capital spending. Lower capital spending by memory chipmakers impacted SME (semiconductor manufacturing equipment) suppliers.
Despite weak fourth-quarter earnings and first-quarter guidance, semiconductor stocks have risen in 2019 as most companies stated that the demand will recover in the second half of 2019. Advanced Micro Devices, Intel, and Western Digital stated that overall 2019 growth will be skewed towards the second half as new products hit the market and 5G (fifth generation) deployment ramps up. Meanwhile, in the first half of the year, the industry will likely absorb the excess semiconductor inventory created due to weak holiday season sales. Such guidance has helped the VanEck Semiconductor Vectors ETF (SMH) rise 13% YTD.
AMAT’s stock price movement
Investors can get exposure to the entire semiconductor industry either by buying semiconductor ETFs or by buying SME stocks like Applied Materials (AMAT), Lam Research (LRCX), and KLA (KLAC). These three stocks have risen 19%, 27%, and 16% YTD, respectively, on the anticipation of strong growth in the second half of 2019. They outperformed the SMH, which has risen 13%.
For investors who believe that the semiconductor growth will revive in the second half, SME stocks are a good bet as they could grow faster than SMH and give them exposure to all growth trends from processors to memory to modems.
While AMAT, LRCX, and KLAC have risen faster than SMH in 2019, they also fell faster than SMH in 2018 when demand in China plunged and the graphics market suffered from excess inventory and the memory chip market suffered from oversupply. AMAT, LRCX, and KLAC fell 34%, 24%, and 12%, while SMH fell 11% in 2018.
SME stocks pose a downside risk if semiconductor growth fails to revive in the second half of 2019. There will be some clarity on this when AMAT releases its fiscal 2019 first-quarter earnings on February 14.
In this series, we will see what investors should expect from AMAT’s upcoming earnings.
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