The PHLX Semiconductor Index (SOX) is down by 9.2% since a recent intraday high on Aug. 8, and Morgan Stanley sees more trouble ahead, per a report in Barron's. Back in 2015, chip stocks endured a decline of 30% from peak to trough, and the fundamentals today look equally troublesome, especially regarding excess inventories. The chip stocks with the most negatives surrounding them right now are, per Barron's, ON Semiconductor Corp. (ON), NXP Semiconductors NV (NXPI), Analog Devices inc. (ADI), Maxim Integrated Products Inc. (MXIM), and Texas Instruments Inc. (TXN). The table below shows how far these stocks, the SOX index, and the S&P 500 Index (SPX) are down from their 2018 highs.

Chip Stocks May See Steeper Declines

Stock or Index % Decline From 2018 High
Analog Devices (29.5%)
Maxim Intergrated Products (29.5%)
NXP Semiconductors (36.6%)
ON Semiconductor (38.1%)
Texas Instruments (15.9%)
PHLX Semiconductor Index (12.8%)
S&P 500 Index (4.5%)

Source: Yahoo Finance; data as of the close on Oct. 17.

Significance for Investors

"The biggest difference in semi fundamentals today versus the last correction seen in 2015 is in the degree of excess that built up in the supply chain this go-round," writes Morgan Stanley analyst Craig Hettenbach, in a recent research report quoted by Barron's. "In 2018, cyclical indicators (lead times, double ordering, inventory) flashed red in contrast to the benign cyclical backdrop of 2015," he added. (For more, see also: Chip Stocks May Have Hit Their 2018 Highs.)

Back on Aug. 9, Morgan Stanley downgraded semiconductor stocks from "in-line" to "cautious," per Barron's. Hettenbach recommends that investors use any price upticks as opportunities to reduce their exposure. Meanwhile, Intel Corp. (INTC) and Advanced Micro Devices Inc. (AMD) are not covered by Hettenbach, and are not dealing with the same inventory issues as other companies in the industry, Barron's notes.

"In 2018, cyclical indicators (lead times, double ordering, inventory) flashed red in contrast to the benign cyclical backdrop of 2015." —Morgan Stanley

As shown in the table above, ON Semiconductor and NXP Semiconductors already are down by nearly 40% from their highs. KeyBanc Capital Markets believes, per Barron's, that some semiconductor stocks with “broad-based” auto and industrial exposure could have a rough earnings season, including Analog Devices, Maxim Integrated, and Texas Instruments. 

Deutsche Bank, per CNBC, recently cut its price targets on Analog Devices, Maxim Integrated and Texas Instruments, and reduced its earnings estimates for 2019 by an average of 5% for 8 chip stocks that it covers. Deutsche Bank analyst Ross Seymore writes that, across the industry, "risks of incremental cuts to revenue/EPS estimates is rising." Seymore indicates that "macro uncertainties" such as tariffs and falling purchasing manager indexes (PMIs) have been weighing on the sector for months. (For more, see also: 5 Chip Stocks Facing Steep Declines.)

Looking Ahead

As the analysts remind investors, the semiconductor industry is highly cyclical, with the potential for more disruption. Also, if history is repeating itself, the stock price pullback may be far from over. Ross Seymore of Deutsche Bank observes that the 2015 downturn lasted for 2 to 3 quarters and sent chip stocks down by an average of 25%, by his calculations.