Valuations on Chip Stocks are Low, but Demand Concerns Keep Buyers Away

Semiconductor stocks are trading at reasonable valuations, but investors remain wary of owning chip stocks on concerns the global economy is weakening.  As a result, semiconductor chip stocks are the worst-performing group in the S&P 500 this year, down -38%.  While that has reduced valuations to bargain levels, investors are staying away on signs of cooling demand.

Sentiment on the semiconductor chip sector is poor, and the near-term outlook remains weak.  Last Friday, Micron Technology (MU), the largest U.S. maker of memory semiconductor chips, gave a disappointing forecast, while Intel (INTC) said the macroeconomic environment is weakening. Also, prices have dropped for memory chips, and research firm Gartner expects personal computer shipments to fall -9.5% in 2022. 

While chip stocks look cheap, some analysts are concerned things could get worse if weakness spills over from consumer products into areas like enterprise spending and cloud computing.  Hood River Capital said, “we’re in the first innings of this, and the last few could come pretty quickly and be pretty brutal.”

Falling demand in the chip industry marks a sizable shift from 2020/21, when the industry struggled with a Covid-driven supply crunch.  It also is an ominous sign for the health of the broader economy, given the prevalence of chips in everything from cars to appliances, games, and artificial intelligence. Bank of America last week said, “semiconductor chip downturns happen every 3-4 years, and we could be due for another one.”

The rout in chip stocks has left the Philadelphia Stock Exchange Semiconductor Index ($SOX) trading at 13 times forward earnings, below its 10-year average of 16 times.  Mizuho Securities said while chipmakers have gotten cheaper, earnings estimates need to come down more for them to look attractive.  Mizuho added that while low valuations could limit the downside potential of chip stocks, “you need a bigger catalyst than stocks just looking cheap.” 

• Stocks Tumble on Persistent Recession Fears
• Beat the Bears With This Dividend King
• Recession Fears Weigh on Stocks
• Protecting Against An August Volatility Spike