Chipmaker stocks, as measured by the Philadelphia Semiconductor Index (SOX), have been in turmoil recently. After reaching a 52-week high on July 25, 2019, the SOX plummeted by 13.1% to hit a recent intraday trading low just 11 days later on Aug. 5. The SOX has since recovered, closing 6.5% below that 52-week high on Sept. 4, but trade conflicts and slowing economic growth continue to cloud the outlook for the industry. By comparison, the S&P 500 Index (SPX) is down by 3.0% from its own 52-week high.

The declines from their 52-week highs to the close on Sept. 4 for several leading chipmakers were: Texas Instruments Inc. (TXN), down 4.4%, Nvidia Corp. (NVDA), down 42.4%, Advanced Micro Devices Inc. (AMD), down 12.9%, Broadcom Inc. (AVGO), down 12.4%, Micron Technology Inc. (MU), down 9.3%, and Intel Corp. (INTC), down 17.9%.

These stocks were battered on Tuesday, Sept. 3, with Texas Instruments down by 2.4% for the day, while Broadcom Inc. dropped by 3.5% from its intraday high to its low. They recovered on Wednesday, Sept. 4, but it would be premature to see this as the reversal of a longer downward trajectory.

Significance For Investors

On a year-over-year (YOY) basis, total semiconductor sales have been falling steadily in recent months, per data from the Semiconductor Industry Association reported by Bloomberg: down 15% in May, down 17% in June, and down 15% in July. Indeed, both Citigroup and Morgan Stanley indicate that July sales were below their own estimates, and Citi has cut its full-year 2019 projection of total chip sales slightly, from $410.7 billion to $409.9 billion, Bloomberg notes.

The article cited several gloomy notes from analysts. "We remain deep in a semiconductor downturn,” says David Wong of Nomura Instinet. There will be “no 2H [2019] demand rebound” for semiconductor companies, and consensus forecasts for 4Q 2019 are "overly bullish," per Shawn Harrison of Longbow Research. “Broader semis remain weak, given end-demand challenges nearly everywhere,” according to Joseph Moore of Morgan Stanley.

Already hurt by slowing sales of mobile phones and a long term decline in the personal computer market, chipmakers had been counting on continued robust growth in cloud computing to bolster their sales. However, the building of data centers to support cloud computing is in the midst of a worldwide "pause," as Colette Kress, CFO of Nvidia, put it during a conference call in May, as quoted by MarketWatch.

Some analysts, however, believe that chip sales are bottoming out. “Given the severity of the decreases, we think downside from here is limited,” writes Mitch Steves of RBC Capital Markets, though Bloomberg indicates that he refers specifically to memory chips.

Looking Ahead

“We believe patient investors will be rewarded for being long semis,” wrote William Stein, an analyst with SunTrust Robinson Humphrey, on Aug. 5, as quoted by Barron's. “Looking through any tactical correction [due to tariffs], the big move is still to the upside,” he indicated.

Stein's picks included NXP Semiconductors NV (NXPI), Microchip Technology Inc (MCHP), and Analog Devices Inc. (ADI), with respective target prices of $122, $104, and $122. These would represent respective advances from the Sept. 4 close of 19.8%, 20.2%, and 11.7%.