Slowdown in Auto Sales Could Weigh on Chipmakers

Among technology stocks in 2022, semiconductor chip makers with significant exposure to the automotive industry out-performed, as tight chip supplies kept demand from carmakers strong. However, a slowdown in auto sales this year could undercut the earnings of those chipmakers as demand for chips falters.

The three best performing stocks in the Philadelphia Semiconductor Index ($SOX) last year were chipmakers that generated a large percentage of their sales from automakers.  The stock prices of Analog Devices (ADI) and ON Semiconductors (ON) fell less than -10% in 2022, and Texas Instruments (TXN) fell -12%, which were much smaller declines than the -33% drop  seen in the Philadelphia Semiconductor Index.

Chipmakers in the automotive industry have benefited from the seismic shift to electric vehicles (EVs), which have more advanced systems that require more semiconductors than traditional cars with internal combustion engines.  However, there are signs that growth in the EV market is slowing, specifically in Tesla (TSLA), which just reported a third straight quarter where deliveries missed estimates.  In another cautious sign for the automotive industry, auto-loan defaults have been rising, and prices for used cars have been falling.

Tesla has begun offering discounts to clear inventory and recently cut production at its Shanghai plant. None of this is positive news for chipmakers that have benefited from the rise in EVs, whose batteries and electric motors need circuitry powered by semiconductors to control them.  So far, though, chipmakers have remained upbeat about vehicle-related demand.  Texas Instruments called the auto market the one bright spot in a generally disappointing Q4 forecast.  Also, Micron Technology (MU) was positive about demand from automakers, despite warning about overall profitability.

Earnings estimates for chipmakers that supply the auto industry have held up better than their counterparts.  For example, the average estimate for 2023 revenue for Analog Devices has dropped by just 0.2% over the past quarter, though both ON Semiconductors and Texas Instruments have seen more sizable declines.  However, for the overall semiconductor chip industry, revenue estimates have been slashed dramatically as data from Bloomberg Intelligence shows analysts expect semiconductor revenue to fall 4.3% in 2023, compared with 2.4% growth that was expected at the end of September.

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