If the first quarter was a bad quarter for semiconductor stocks, the second quarter was just as bad, if not worse.The slide that started in the first quarter continued in the second quarter, leaving the semifinals with a big hole at the start Q3. Furthermore, existing trends favor additional losses in the second half of 2022. In addition, the industry outlook is getting more attention as more companies issue pessimistic forecasts. Still, despite all the negatives, some semifinals were better than others. Those who have been involved for a long time may still want to look for potential bargains in the sell-off. Why will be introduced next.
Trend down as losses increase
Semi-finished products aren’t the only industry experiencing difficulties in 2022. Other sectors are also struggling, but semi-finished products still underperformed in a tough first half for the stock market. For example, the iShares PHLX Semiconductor ETF (SOXX) fell 35.5% in the first half of the year after falling 12.7% in the first quarter. In contrast, the Invesco QQQ Trust (QQQ) fell 29.6% in the first half and the SPDR S&P 500 ETF (SPY) fell 20.6%. The energy sector is the difference maker for the latter.
As shown in the chart above, losses gradually increased in the first half of the year. In fact, a downtrend can be identified by connecting the lows and highs into a channel. June was a particularly bad month for the semifinals. On the other hand, stocks are approaching oversold conditions, which favors a rebound, even if only temporarily. Notice how the SOXX bounces off the lower trendline. The stock is now at a lower trendline again. There are no guarantees, but July’s rally after a major sell-off in June isn’t all that unusual considering past history.
Also, while many semifinals were lower in the first half, some were hit harder than others. To find out who they are, it’s necessary to look at every semiconductor stock in SOXX. Companies in SOXX include Broadcom (AVGO), Intel (INTC), Nvidia (NVDA), Texas Instruments (TXN), Advanced Micro Devices (AMD), Qualcomm (QCOM), Microchip (MCHP), Marvell (MRVL), Micron (MU), Applied Materials (AMAT), Lam Research (LRCX), KLA Corp (KLAC), NXP Semiconductors (NXPI), Analog Devices (ADI), TSMC (TSM), ASML (ASML), ON Semiconductor (ON), Teradyne (TER), Skyworks (SWKS), Monolithic Power Systems (MPWR), Entegris (ENTG), Qorvo (QRVO), STMicroelectronics (STM), Wolfspeed (WOLF), Lattice Semiconductor (LSCC), MKS Instruments (MKSI), United Microelectronics Corporation (UMC), Synaptics (SYNA), Universal Display (OLED) and ASE Technology (ASX). The table below shows the gain or loss for each company.
Change – 12 months
Change – 6 months
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Who does it better and who does it worse
Similar to SOXX, many of the companies on the list are on a downward trend, including well-known brands such as NVDA, INTC, and AMD. None of SOXX’s 30 stocks posted a loss in the first half, but SYNA and MRVL topped the list with year-to-date declines of more than 50%, partially offset by sharp gains in the first six months. The biggest losers over the past 12 months are OLED, QRVO and SWKS, all of which have lost more than half their value over the period.
On the other hand, only three stocks remain in positive territory after the past 12 months. They are in particular AVGO, MPWR and ON. ON has proven to be the most resilient of all stocks, up 31.4% 12 months later, even after falling 25.9% in the first half. Note that ON is the top performer in 2021, aside from NVDA, which gets a boost from 2021, a banner year for cryptocurrencies. Year to date, the difference between ADI and TXN is that H2 has the least loss on us.
There doesn’t seem to be any real momentum going into Q3 for any stock, but if one comes close, it’s probably LSCC. The LSCC outperformed the smallest decline in June, although still down 6.8% in a difficult month. LSCC is also down 13.7% over the past 12 months, also outperforming most companies. LSCC has traded sideways over the past few months, which is a positive sign considering the situation.
The outlook for the semiconductor industry continues to deteriorate
In some respects, the poor performance in the semifinals was to be expected. For example, a previous article pointed out how semis benefited from an environment largely driven by Fed policy that forced people into stocks. With the imminent Fed tightening, this environment is expected to become less favorable, creating a strong headwind for semis in 2022. This argument has been true so far this year.
These arguments have been reinforced by geopolitical events in Eastern Europe in recent months. Not only has it fueled inflation, but it has forced the Fed to become more restrictive, adding to the pressure on the stock market and the broader economy. Also, soaring inflation and a slowing economy appear to be having an impact on consumer spending.
Sales of consumer goods such as smartphones and personal computers are falling. Just recently, MU became the latest company to warn of weakening consumer demand when it issued downbeat guidance. MU also announced cuts in manufacturing plant and equipment, which in turn spooked equipment suppliers such as AMAT, LRCX, KLAC and ASML.
MU’s views do not contradict reports from other companies. Heavyweights such as TSM and INTC have both reported weakness in certain segments, especially those dealing with consumers. However, there are other parts that perform better by comparison. Investors may want to take this into account when picking stocks.
For example, automotive-grade chips are still in short supply, although probably not as much as they once were. Businesses have held up better than consumers on things like data centers, but may start cutting back in anticipation of a worsening economic environment, including a possible recession.
Semis have certainly changed in terms of the stock market in the first six months of 2022. Many semi-finished products have rallied well into 2022, but the industry now finds itself underperforming at the start of the third quarter, racking up huge losses in the first half. The headwinds that some thought would cause problems in the semifinals turned out to be just as powerful.
Many semi-finished products are in a downward trend, and this trend is likely to continue, as the headwinds that have brought semi-finished products to their current state remain in place and are unlikely to disappear anytime soon. The central bank’s tightening is not over and they may even have to step up if inflation keeps rising. Geopolitical tensions have not subsided and are likely to intensify further. There are a lot of downsides, and there are no remedies yet.
It’s true that many semis are still reporting strong earnings growth, but the worry is that semis may have passed the peak of the current cycle. Downbeat forecasts like the recent one from MU will only add to that perception. Many industry watchers have been looking for signs that the cycle is turning and the semiconductor industry is headed for a downturn. While the industry may not be there yet, there is a growing perception that it is going downhill for semi-finished products. Based on price action this year, the market appears to be leaning toward this view.
There is a saying that the trend is your friend, and the trend shows that the semis are going lower. If you like to invest based on the trend, it’s obvious what needs to be done to bet on lower prices, especially when it comes to stocks in well-defined downtrends like QRVO and SWKS to a lesser extent.
That being said, trends won’t last forever. Some people may wish to base their decision on some other criteria. For example, some people might be more interested in the fundamentals of things and choose a name that can move in a certain direction from the industry. In this context, QCOM is a way to leverage the global adoption rate of 5G networks. Advanced packaging is another industry trend that ASX might be worth considering.
Others may want to consider trading pairs by longing the stronger of the two and shorting the weaker of the two. The idea here is that if or when the market slides for the reasons above, the stronger of the two competitors will fall less than the weaker. INTC and AMD are the two names.
Another group might be interested in names that are thought to be trading below their fair value, especially if many companies are down sharply in 2022. MU is a name that comes up frequently in this regard due to its relatively low multiple, although some may be wary of a name exposed to the memory market, which tends to be hit harder during downturns. Not only do other names like ASX and UMC have single-digit multiples, but they also offer dividend yields of 9-12%, which can come in handy when stock gains are hard to come by. Bonuses give you the flexibility to wait and get through tough times.
Dividends could indeed be cut, but the financial health of UMC and ASX gives them enough wiggle room to keep paying dividends even if sales and earnings take a major hit. Both continued to deliver strong earnings growth despite headwinds. UMC, in particular, has long-term agreements with customers with fixed commitments in terms of capacity and pricing. As a result, UMC has ensured that its new fab will be operating at full capacity when it comes online, without suddenly losing customers even as the semiconductor industry goes into a downturn and the company’s demand for foundries dwindles.
At the end of the day, despite a temporary rebound, semis are likely to head lower. This has been a trend throughout the year, and there are few signs that this trend will change in the near future. However, some may wish to take advantage of this opportunity to get into certain stocks on a dollar-average basis with an eye toward the long term. After all, the world still needs semiconductors. Nonetheless, it is still possible that the slide to the semifinals will continue in the second half of the year. Investors should position accordingly.