While fundamentals for many semiconductor stocks are in a trough, investors are feasting on them like pigs this year, devouring chip stocks amid a cyclical downturn and hopes for an imminent upturn.
But the second-quarter earnings season for semiconductor stocks could determine whether those investors get fatter or get slaughtered.
A lot will depend on company outlooks for the second half of the year and whether a cyclical upturn is actually at hand.
Year to date through Wednesday's close, the Philadelphia semiconductor index, known as SOX, had risen 50%. That compares with a 19% increase for the S&P 500 index. The SOX includes the 30 largest semiconductor stocks traded in the U.S.
However, the earnings season got off to a rough start Thursday after Taiwan Semiconductor Manufacturing offered a disappointing outlook for the second half of 2023.
Inventories Weigh On Semiconductor Stocks
"Despite the strength of the SOX, we call into question the speed of the approaching fundamental recovery given persistent weakness that contradicts its anticipated slope," Deutsche Bank analyst Ross Seymore said in a note to clients.
Seymore cited record high chip inventories and continued weakness in many electronics markets including PCs and smartphones.
Meanwhile, two growth markets include artificial intelligence and related chips for data centers. There also are chips for electric vehicles, he said.
Nvidia has been the chief beneficiary of the recent AI-spending boom, but the trend also should help AMD, Broadcom and Marvell, Seymore added.
Among automotive chipmakers, Indie Semiconductor, ON Semiconductor and NXP Semiconductors are well positioned, he said.
AI, Electric Vehicles Big Growth Markets
BofA Securities analysts Vivek Arya and Blake Friedman also are leaning into semiconductor stocks tied to AI data centers and electric vehicles. Top picks include Nvidia, Broadcom, Marvell, Onsemi and NXP, they said in their note to clients.
Outside of artificial intelligence and EVs, BofA is "lukewarm" on semiconductor stocks for the second half of the year, Arya and Friedman said.
The analysts see weakness in PCs, smartphones, telecom and industrial sectors for the remainder of 2023. The sluggish economy in China also is a drag on those markets, they said.
Given the run-up in the SOX this year, semiconductor stocks may have gotten "in front of their skis," Jefferies analyst Mark Lipacis said in a recent note.
"We sense that most investors believe that semis have run too far, too fast, and need to give some performance back before moving higher," Lipacis said.
Semiconductor Stocks Seek Proof Of Bottom
Wall Street widely expects second-quarter reports to confirm a fundamental bottom for the semiconductor industry, Evercore ISI analyst C.J. Muse said in a note. That should set the stage for a gradual recovery in the second half of 2023, he said.
"With year-over-year revenue declines bottoming for semis, excluding memory (chipmakers), in April and May, the fundamental bottom is in," Muse said.
Semiconductor stocks exposed to the AI megatrend are among his top picks, Muse said. They include Nvidia, Broadcom and Marvell. Also, he likes chip stocks with attractive valuations such as Analog Devices and NXP.
IBD's fabless semiconductor group ranked a powerful No. 4 out of 197 industry groups as of Thursday. Further, the semiconductor manufacturing group ranked No. 48. Also, the semiconductor equipment group was No. 31.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
