Semiconductors' Two-Day Selloff Is the Talk of Tech Traders

(Bloomberg) -- It wasn’t the FAANGs this time.

Traders of technology stocks have been focused squarely on one chunk of the sector recently: the semiconductors, and the pain that the group has endured over the past two days.

The Philadelphia Semiconductor Index fell 2.5 percent Friday, closing out its biggest two-day skid since late June. All 30 members traded lower, with Microchip Technology Inc. pacing declines after inventory woes and a muddled forecast. The benchmark had fallen 1.1 percent Thursday after Morgan Stanley warned that growing cyclical risks “could drive a meaningful correction” to the sector.

Semiconductors' Two-Day Selloff Is the Talk of Tech Traders

Microchip slumped 11 percent Friday, its biggest drop since October 2014. The company’s fiscal first-quarter earnings report revealed inventory issues with its recent acquisition of Microsemi Corp. Management also said on the conference call that talk of tariffs and a trade war is making customers nervous and causing them to pull back on investments.

“Commentary about tariffs leading to lower business confidence and a reduction in sell through in distribution in China is a new development, with broader negative implications for the group,” Morgan Stanley analyst Craig Hettenbach said in a note to clients. He called it “a very messy first quarter out of the gate with Microsemi.”

Hettenbach has an equal-weight rating on Microchip and is the only one of 20 analysts tracked by Bloomberg who doesn’t recommend buying the shares.

Microchip bulls rushed to the company’s defense, calling the stock’s drop a buying opportunity and saying the inventory issues will be a quick fix. Jefferies analyst Mark Lipacis said the shortfall in the revenue forecast is mostly due to normalization of channel-shipment practices after the Microsemi acquisition, rather than a “cycle-peak inventory correction.”

Advanced Micro Devices Inc., whose 85 percent gain this year is by far the best in the Philadelphia Semiconductor Index, continues to show resilience to industry headwinds. The shares pared early gains to close down 0.2 percent after Goldman Sachs upgraded its rating to neutral from sell, saying the chipmaker is poised to take market share after rival Intel Corp.’s manufacturing issues.

The chip sector may continue to be volatile next week with earnings from Nvidia Corp. and Applied Materials Inc. due on Thursday.

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