Semiconductor Stocks Face Challenges, Industry Recovery Delayed

Semiconductor stocks are facing a challenging month, experiencing a decline in valuation multiples due to higher interest rates. In addition, there are indications that the anticipated rebound in the industry might be further delayed.

The iShares Semiconductor (ticker: SOXX) exchange-traded fund, which tracks the performance of the ICE Semiconductor Index, has dropped by 8% month to date and 2.5% this week.

Memory chips play a vital role as they are present in almost every electronic device. However, recent checks suggest that there is no sign of recovery for memory chips yet. This indicates that the overall chip industry’s revival is still on hold.

Piper Sandler analyst Harsh Kumar, in his recent conversations with industry contacts, discovered that DRAM chip demand remains weak. DRAM, short for dynamic random-access memory, is commonly used in desktop computers, smartphones, and servers. In light of this information, Kumar maintained his Neutral rating for Micron Technology (MU).

“Overall DRAM demand with large enterprise and cloud customers is still mixed at best,” Kumar wrote. He also emphasized that it might be premature to invest in the stock at this point, hence opting to stay on the sidelines.

Weak August Revenue for Taiwan Chip Suppliers

Further contributing to the industry’s slow recovery, Cowen analyst Matthew Ramsay highlighted that the aggregate August revenue from Taiwan chip suppliers was 3.2 percentage points below the historical 10-year average for monthly seasonality when compared to July.

These developments paint a picture of challenges faced by semiconductor stocks and indicate that the road to recovery may take longer than initially anticipated.

Mixed Bag in August

In August, there was a combination of positive and negative news in the semiconductor industry. The macroeconomic challenges experienced in the first half of 2023 are continuing to have an impact in the second half.

Disappointing Outlook for 2024

Intel (INTC) delivered disappointing commentary on the outlook for next year’s profitability. Analysts had high expectations, predicting a 5.5 percentage point improvement in gross profit margin for 2024. However, during Intel’s developers conference, CFO David Zinsner stated that although there will be gross margin expansion, it may not be as significant as initially anticipated.

Impact of Rising Interest Rates

Another factor to consider is the rise in 10-year Treasury yields, reaching a 16-year high of near 4.5% this week. Technology and chip stocks are particularly vulnerable to rising interest rates. Higher rates lead to a decrease in the value of future earnings, which significantly affects growth-oriented stocks that rely heavily on projected profits.

Managing Expectations

Investors should be cautious and manage their expectations until concrete evidence of an upturn in the market is evident. The current market environment is different and requires a measured approach.

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