Recent Chip-Stock Rally Ends on Signs of Weakening Global Demand

This week’s rally in global semiconductor stocks looks to end today after disappointing earnings from major chipmakers Advanced Micro Devices (AMD) and Samsung Electronics point to a likely downturn in the sector.  Nevertheless, before the negative news, the Philadelphia Semiconductor Index ($SOX) had jumped +8.8% this week, bolstering optimism that the bottom in chip stocks was in.

Hopes were building that the selloff in chip stocks was ending.  The Philadelphia Semiconductor Index had plunged 36% this year, the most since 2008.  Then, however, the market received a rude awakening after Samsung Electronics, the world’s largest memory-chip maker, reported today that Q3 operating profit fell by -32% to 10.8 trillion won ($7.7 billion), well below the consensus of 12.1 trillion won and the first profit decline since 2019.  Also, PC-processor maker Advanced Micro Devices reported Q3 revenue of $5.60 billion, well below the consensus of $6.71 billion, citing weak PC sales and a build-up of inventory in the supply chain.

In a reversal of the boom chipmakers had during the pandemic, the sector has had a rough time this year as rising prices and weaker economies hurt consumption and expanded inventories.  CMC Markets said, “weakened demand and supply-chain woes in the semiconductor sector may have already been priced in, but there is still a darkened outlook. Excess inventories and cooling demand may further slow down the sector’s growth.”

Semiconductor stocks had rallied earlier this week after Morgan Stanley said the cyclical downturn appears to be finally nearing a bottom.  There was optimism that the price of chip stocks now fully reflects the slowdown.  The Philadelphia Semiconductor Index is priced at 14.5 times earnings, an 11% discount to its average multiple of 16.3 for the past decade.  However, that average reflects one of the most significant bull markets in history, so it’s hard to say that ship stocks are now cheap.

This year's decline in chip stocks has been widespread, with 28 of the 30 stocks in the Philadelphia Semiconductor Index falling.  The slump was preceded by annual gains averaging 50% for the index between 2019-2021. Radio Free Mobile said the inflection point for chip stocks probably won’t come until 2024, when inflation cools, and demand for semiconductor chips recovers.  Even for memory-chip makers that have seen a sharp drop in demand, it’s “impossible to tell” when the bottom will arrive and how sharp that will be. 

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