(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of SWKS.)
Semiconductor stocks have come under heavy pressure with the iShares Semiconductor ETF (SOXX) falling about 8.5 percent since June 8, approaching correction territory.
The worst may not be over.
Investors have seen multiple contractions over the past two weeks, with money rotating out of chips and into other sectors of the market. Broadcom Ltd. AVGO ) and Texas Instruments Inc. (TXN) have fallen nearly 8 percent, while Skyworks Solutions Inc. (SWKS) has declined about 11.5 percent and NVIDIA Corp. is down nearly 10 percent.
It's important to note that these stocks, for the most part, take their cues from Apple Inc. (AAPL), since many of these chip producers' components go into Apple products, and thus are heavily reliant on Apple's success. Any delay in an iPhone 8 rollout this year could push down chip shares and give investors an opportunity to buy at more reasonable valuations.
It was just yesterday that we focused on Apple and the possible setup in the stock as investors wait for the release of the iPhone 8. Citigroup noted there could be a delay in the launch of the new phone, potentially pulling analysts' estimates for Apple lower. The spillover effect could move right into the chip sector. (See: Apple: The Opportunity We Have Been Waiting For.)
Many of the chip stocks have seen significant multiple expansion amid rising expectations for continued improvement in demand. Given these stocks' high valuations, there is plenty of room for share prices and valuations to fall.
Many semiconductor stocks have been trading on the high side of their historical multiples over the past 18 months. Now, a more uncertain outlook may bring valuations more in line with these companies' fundamentals, which remain healthy.
Whether and how much the chip stocks fall may hinges heavily on the quality of results - and guidance - in the coming earnings season, especially from Apple. The sector may see more uncertainty until the and iPhone is launched sometime this year. The market has two ways of dealing with stocks that run ahead of themselves: correct swiftly and severely - or trade sideways until the fundamentals have caught up. In the case of the chips, their rich valuation indicates that may fall further before rising again.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.