Weak Demand Outlook Drags Down Semiconductor Stocks


Nov. 20 2020, Updated 3:24 p.m. ET

Semiconductor companies’ growth outlook

The semiconductor industry has been badly hurt by the economic downturn caused by the US-China (FXI) trade war. As things began to cool down between the two countries, many chip companies anticipate a “V” shaped recovery in demand in their first-quarter earnings. They expect earnings to bottom out in the second quarter as the industry works toward absorbing the excess inventory piled up because of weak demand.

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Chip companies expect growth to pick up in the second half of calendar 2019 as excess inventory clears and tech companies resume their normal buying in preparation for new product launches and holiday season sales. This growth anticipation has kept chip stocks on a growth trend. The VanEck Vectors Semiconductor ETF (SMH) rose 25% between January 1 and March 21.

Could demand recover in the second half of 2019?

As we approach the second quarter of 2019, some chip companies and macroeconomic and industry statistics are indicating delays in demand recovery.

This month, Samsung (SSNLF) stated that its first-quarter profit might miss analysts’ estimates. On March 21, Germany’s purchasing managers’ index showed weakness in industrial activity, especially automotive. On March 27, German chip maker Infineon Technologies lowered its fiscal 2019 revenue guidance for the second time in two months.

The above data raised concerns that growth will be subdued in the second half of 2019. With every new data release, semiconductor stocks with exposure to China’s smartphone and automotive markets have fallen.

Semiconductor stocks react to weak demand

Infineon’s direct competitors, NXP Semiconductors (NXPI) and STMicroelectronics (STM), fell 8.9% and 15.6% between March 21 and 28. Memory chip maker Micron (MU) was also impacted, falling 10.6%. Texas Instruments (TXN), Skyworks (SWKS), Analog Devices (ADI), and Cypress Semiconductor (CY), other stocks with exposure to the automotive and smartphone markets, fell more than 5%. These declines pulled down SMH by 4.8%.

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