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Will Semiconductor Stocks Continue to Rally?

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Jun. 27 2019, Published 6:36 a.m. ET

Uncertainties prevail for semiconductor stocks

Several semiconductor stocks staged an impressive rally yesterday following Micron’s (MU) impressive third-quarter results. What does this mean for semiconductor stocks going forward? Will they stage a comeback in the second half of 2019? Semiconductor companies are cyclical, and the memory industry is already struggling through a cyclical downturn caused by an oversupply of DRAM (dynamic random access memory) and NAND (negative AND) chips.

Trade war escalations and the US ban on Huawei have further impacted semiconductor companies. A lot will depend on the G20 Summit in Japan where President Trump will meet with his Chinese counterpart over the weekend. A favorable outcome will drive several stocks higher.

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Micron’s guidance a concern

While Micron beat third-quarter analyst estimates, its guidance was not encouraging. Micron has estimated revenue to fall by 6.0% sequentially to $4.5 billion with adjusted earnings per share of $0.45 in the fourth quarter. Analysts estimated Micron to post revenue of $4.56 billion with EPS of $0.61 in the fourth quarter.

Inventory levels remain high

Micron’s chip inventory levels have now increased sequentially for six consecutive quarters. This oversupply has driven memory chip prices lower, resulting in a down cycle for semiconductor companies. In the third quarter, Micron’s inventory rose 12.0% sequentially to $4.91 billion.

Inventory levels for Micron and peers are expected to remain high for the next six months. The Semiconductor Industry Association has forecast chip sales to fall by 12.1% YoY in 2019 and then rise by 5.4% in 2020. IHS Markit has stated that semiconductor companies are experiencing their worst downcycle in over a decade.

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