: Chip stocks could suffer worst year ever as effects of shortage-turned-glut spread


Chip stocks sold off again Tuesday with havens within the battered semiconductor industry disappearing as the effects of a supply glut spread following a years-long shortage.

The PHLX Semiconductor Index SOX fell nearly 4% Tuesday to close at a loss of 2.5% to close at 2,218.49, its lowest finish since Oct. 2, 2020, dragged down by shares of its largest component by market cap. U.S. shares of Taiwan Semiconductor Manufacturing Co. TSM, which fell as much as 7% to finish down 5.9% at $63.45, following a Digitimes report that customers are already beginning to cancel slots.

Chip stocks started their overall dive Friday, with the SOX index down 12% since the announcement of widened restrictions on what U.S. chip makers can sell to China, potentially disrupting non-U.S. parts of the sector that may have manufacturing sites in China.

Read: Chip stocks crushed to two-year low as more tech, AI ban to China add to woes

Chip stocks have dropped nearly 44% collectively in 2022, putting them on a dangerous trajectory with nearly three months left in the year. The worst years on the SOX index were 2002 and 2008, when it finished the year down 44.6% and 48%, respectively, according to FactSet data.

And there could be more shoes to drop for the chip industry. While much of the downturn has landed on the shoulders of big-name companies focused on consumer electronics — including Nvidia Corp. NVDA, Intel Corp. INTC, and Advanced Micro Devices Inc. AMDinvestors have found safety in other sectors that have not fallen off, but at least one analyst thinks those safe havens could be growing dangers as well.

In a Tuesday note titled “Analog Party Over,” Citi Research analyst Christopher Danley cut his estimates on Texas Instruments Inc. TXN, NXP Semiconductors NV NXPI, and Microchip Technology Inc. MCHP. Danley said he favors Analog Devices Inc. ADI, which was one of the first analog chip makers to indicate weaker-than-expected demand. Until recently, analog chips, or those lower-tech microprocessors that are now crucial to autos and thousands of other products, had appeared pretty well insulated from the downturn.

“Our checks indicate the pushouts and cancellations that hit Analog Devices in July are impacting the rest of analog as lead times are declining,” Danley said. “We believe weakening demand, especially in Europe, and high inventory is causing the downside.”

Expecting a weak showing from Texas Instruments and NXP, Danley said “this is just the beginning of the downturn and every company/every end market will feel it.” Danley hopes for a bottom some time in the first half of 2023.

A little more than a month ago, Danley broke with others on Wall Street, claiming that auto and industrial customers, the ones hardest hit by chip-supply shortages, showed signs of a correction.

“When Will Semi Pain End (or at Least Moderate??” posed Mizuho analyst Jordan Klein in a Tuesday note. Klein said there is now “no place to hide,” not even in analog stocks, which “have started to come unwound as holders seek to quickly reduce exposure to anything and everything Semi related.” Klein said investors “biggest fear is now pending earnings.”

TSM is scheduled to report earnings on Thursday, along with Dutch chip-equipment maker ASML Holding NV. The week after that U.S. chip companies kick off their earnings, beginning with Lam Research Corp. LRCX on Oct. 19. Back in July, ASML cut its outlook for the year, while Lam said it was operating in “a supply-constrained environment.” Earnings season for U.S. chip-related companies doesn’t take off until Texas instruments reports on Oct. 25.

Read: ‘This is worse than 2019’: Micron faces ‘unprecedented’ supply issues and analysts are split on if it has hit bottom

So far, some analog chip makers are faring much better than their bleeding-edge counterparts. Shares of ON Semiconductor Inc. ON and Texas Instruments are still some of the best performers year-to-date on the SOX index with 12% and 19% declines, as shares in Nvidia and AMD have both suffered year-to-date drops of at least 60%.

Auto and industrial chips were some of the scarcest kinds out there at the peak of COVID-19-related shortages, because many of those chip makers canceled their slots with third-party fabricators, or fabs, like TSM. By the time car sales picked back up, those who had canceled found themselves out in the cold because then fabs had months-long waiting lists because the pandemic caused a huge initial demand for PCs, gaming consoles and mobile devices.

What a difference a year will make. Around this time last year, AMD was feeling “very, very good” about the data-center market, and there were concerns that the chip shortage threatened production of Apple Inc.’s AAPL iPhone 13.

It was also around this time last year, when PC growth cooled considerably, but, with supply-chain nightmares and persistent shortages at the time, few people thought there was a chip glut building up. Chip stocks then went on to record highs, peaking at the dawn of 2022 with the SOX index closing at a record 4,039.51 on Dec. 27.

Now, PC shipments are seeing their worst declines since the 1990s and show little signs of reversing course soon.

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