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Semiconductor Stocks Rally on Earnings Surprise

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Last week brought positive momentum to semiconductor stocks as most chip companies reported better-than-expected earnings. Although their revenue declined YoY (year-over-year), the rate of decline was lower than what investors and analysts feared amid US-China trade tensions. As a result, the VanEck Vectors Semiconductor ETF (SMH) rose 3.1% between July 22 and 26. Some of the top gainers were Teradyne (TER) and Texas Instruments (TXN), which rose 21% and 9%, respectively. Intel (INTC) and Cypress Semiconductor (CY) also rose on strong earnings, but Xilinx (XLNX) fell after its guidance was lower than analysts’ estimate.

Snapshot of last week’s semiconductor results 

Intel’s earnings beat estimates thanks to strong PC demand. Although the data center space stayed weak because of US bans on Chinese companies, Intel stock rallied following news it was selling its smartphone modem business to Apple.

Automotive demand was strong at Cypress but weak at Texas Instruments, where industrial demand was also weak. However, Texas Instruments’ earnings beat analysts’ estimates due to stable revenue from communications thanks to 5G deployment. Teradyne also beat earnings estimates on the back of strong demand in 5G, networking, and memory markets.

The only exception was Xilinx. Whereas its earnings met analysts’ estimates, its guidance missed them. Its lower guidance was a result of the US ban on Huawei. Six months back, Xilinx was one of the top gainers in the semiconductor industry as it benefited from 5G’s rollout. However, global 5G development got caught in the US-China trade war, hampering Xilinx’s key growth driver.

Key trends

This earnings season, 5G and the Huawei ban impacted every US chip company. The US banned its chip companies from transferring any technology deemed critical to national security to Huawei and its affiliates. Huawei is the world’s largest network equipment provider and leader in 5G networks. The ban prevented US chip companies from participating in the 5G opportunity presented by Huawei.

In their earnings calls, the above chip companies stated that they reviewed the Huawei ban and resumed shipment of some products that were not a part of the ban. However, they fear that another trade war escalation might see an outright ban on Huawei. Therefore, most of them refrained from providing guidance for the year. Intel was an exception. It increased its guidance for the year by $500 million based on its better-than-expected second-quarter earnings.

This year has been bleak for semiconductor companies. The World Semiconductor Trade Statistics expects worldwide semiconductor revenue to fall 12% YoY this year, and return to growth next year.

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