Semiconductor stocks have surged throughout 2019, with the sector recently hitting record levels in a rally that has come as a surprise to analysts who continue to view industry trends with caution.
The Philadelphia Semiconductor Index is up more than 20% since a low in late May, gaining despite ongoing concerns surrounding inventory levels, demand and pricing. Traders have also looked past the U.S.-China trade war, which is seen as a major headline risk, given the exposure that chipmakers have to China for both sales and their supply chains.
“We’re in one of the biggest downturns for semis since the financial crisis, but you’d never know it to look at the stocks,” said Stacy Rasgon, an analyst at Bernstein, referring to the pace of revenue growth. “Everyone is expecting a snap back in demand in the second half of the year, and while that looks increasingly unlikely to me, we had better get one because it’s built into valuations.”
The semiconductor index hit record levels last week, though it has since receded. The industry benchmark rose 0.1% on Monday.
The recent record came in part on stronger-than-expected results from bellwether Texas Instruments Inc., which pointed to some stabilization in the industry. However, the company also reported its steepest revenue drop in years, citing “broad-based weakness.” Intel Corp. also reported results that topped consensus forecasts, although analysts said the results benefited from low expectations.
Rasgon told Bloomberg News that he was “surprised” by the market’s positive reaction to TI’s results. “It is executing well, but the results weren’t super, and it didn’t say anything to suggest the environment is getting better.”
TI’s results came after May sales data from the Semiconductor Industry Association, the most recent month for which data is available. The data were interpreted optimistically — analysts wrote that they showed “some signs of life” given decelerating declines — but also served as another cautious data point. May marked the fifth consecutive month of chip sales declines, and represented a year-over-year drop of 14.5%.
A similar trend was seen in June billings data from both the Semiconductor Equipment Association of Japan and industry group SEMI. Moderating declines in the data are “a sign of stabilization,” according to Bernstein, which suggested industry weakness could be “more benign” than it previously thought.
Near-term trading in chipmakers will likely be driven by the group’s quarterly results. A number of companies — including Advanced Micro Devices, Western Digital, Lam Research and ON Semiconductor — are all scheduled to report in the coming days.
John Vinh, an analyst at KeyBanc Capital Markets, forecast “weak sub-seasonal guidance” for the group “given worsening demand trends,” along with “weakening fundamentals vs. elevated valuations” and recent outperformance.
Morgan Stanley’s Joseph Moore on Monday wrote that semiconductor results have been “mixed” thus far this earnings season, adding that “we see difficult industry conditions prevailing” given “signs of trade related inventory accumulation that will need to be reduced down the road.”