Chip Stocks Soar While Analysts Say the Industry ‘Wallows in the Mud’

(Bloomberg) -- The semiconductor sector extended record levels on Wednesday, suggesting a degree of confidence that industry analysts warn could lead to disappointments as key names prepare to report quarterly results in coming weeks.

The Philadelphia Semiconductor Index gained 1.6 percent, extending a move into record territory. The day’s rise was the latest leg up for the group, which has risen more than 45 percent off a December low despite questions over inventories and pricing.

Chip Stocks Soar While Analysts Say the Industry ‘Wallows in the Mud’

“Despite YTD fundamentals remaining challenging across much of the semi sector, investors have chosen to focus on the sector’s post-downturn recovery potential,” Deutsche Bank analyst Ross Seymore wrote in a note dated April 16. He added that while investors “appear very willing” to look through headwinds in anticipation of a rebound, “we believe the timing of that recovery remains uncertain.”

Seymore said he was “surprised” by the index’s rally thus far this year, saying “the marketwide pivot from recession fears to recovery optimism has occurred faster than expected.”

Deutsche Bank was not the only firm to suggest that shares had gotten ahead of fundamentals.

Longbow Research on Wednesday downgraded four stocks in the sector, including industry bellwether Texas Instruments Inc. Analyst Shawn Harrison wrote that consensus expectations for sales improvement in the second half of 2019 were “overly bullish,” and that the firm’s internal checks “provided a more cautious view into any recovery given uncertainty in bookings in China and Europe, greater excess inventory than previously realized, and a return of semi pricing pressure.”

Texas Instruments is scheduled to report its first-quarter results Tuesday afternoon, providing one of the first major reads into how the industry has been faring. Other recent indicators haven’t been strong, however. Samsung Electronics gave a surprise profit warning last month, while Micron Technology gave an outlook that fell below forecasts. It also said it would cut production.

In a note published late Tuesday, Semiconductor Advisors LLC wrote that there was a “disconnect” between stock prices and industry fundamentals.

Referring to the correlation between “the fortunes of the industry and the fortunes of the stocks,” the firm wrote that “we are in one of those periods where the Venn diagram has little overlap as the stocks have been on a tear while the industry wallows in the mud.”

Morgan Stanley, which has been cautious on the sector for months, on Tuesday wrote that “the combination of excessive inventory, weak demand and elevated valuation multiples point to a poor return profile in semi stocks from here.”

Wednesday’s rally was driven in large part by Qualcomm Inc., which climbed 13 percent on the back of a settlement with Apple. The stock is the largest component of the semiconductor index. Intel Corp. provided another boost, gaining 3.5 percent after it decided to exit the 5G smartphone modem business.

The Nasdaq 100 Stock Index also benefited from Qualcomm and Intel gains. The benchmark rose 0.3 percent on Wednesday to close at a record, surpassing its August high.

Semiconductor ETF Was Already Overbought Before Qualcomm: Chart

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