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Investors Are Prepared for Weak Q1 Semiconductor Earnings

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Investors prepare for weak first-quarter earnings results

We’re heading into the first-quarter earnings season, and things look bleak for the entire market. According to FactSet, Wall Street analysts expect the earnings of S&P 500 companies to have fallen 3.9% YoY (year-over-year) and 7.2% sequentially in the first quarter of 2019—the first YoY decline since the second quarter of 2016 and the largest sequential decline in three years.

The semiconductor sector is set to take a big hit, with some of the top chip companies expected to report high-single-digit or high-double-digit YoY revenue declines.

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These YoY revenue declines are expected to be driven by weaker-than-expected end consumer demand, which has piled up inventory and forced some chip companies to reduce production. Weak demand and high inventories will pressure these companies’ margins. The weakness comes as no surprise, as investors have been expecting chip makers’ earnings to bottom out before returning to growth in the second half of 2019.

Investors eye semiconductor earnings guidance

More than by their earnings in the first half, chip stocks’ prices will be determined by their earnings guidances for the second half. Optimism about these guidances has been driving these stocks in the first quarter. The VanEck Vectors Semiconductor ETF (SMH) rallied 24.8% in the first quarter, and Xilinx (XLNX) outperformed its peers with a 49% increase. Xilinx is an outlier in the current semiconductor downturn. At a time when almost all companies are set to report YoY revenue declines, Xilinx is expected to report YoY revenue growth of 29.5% in the fourth quarter of fiscal 2019, which ended in March.

Intel (INTC) stock rose 24.7% in the quarter, in line with the sector, whereas Western Digital (WDC), Lam Research (LRCX), and Advanced Micro Devices (AMD) rose more than 30% each in the quarter. These stocks rose even though the companies guided for double-digit YoY revenue declines in the first quarter on anticipation that growth would revive in the second half.

These stocks will likely fall if the companies report expectations of weak or no growth for the second half of 2019, but they could rise if the companies report better-than-expected growth expectations for the period.

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