Chipmakers Surge as Trade Optimism Offsets Analyst Caution

(Bloomberg) -- Shares of semiconductor companies rallied on Tuesday as optimism that trade tensions between the U.S. and China could be easing pushed investors to look past a growing consensus that an industry rebound is unlikely to occur in the second half of the year.

The Philadelphia semiconductor index advanced as much as 5%, compared with a 1.4% increase in the S&P 500 Index. Among notable gainers, Nvidia Corp. rose 6.8% while Micron Technology Inc. jumped 6.8% and Western Digital Corp. added 6.4%. Texas Instruments Inc. gained 4.2% while Intel Corp. rose 4%.

The advance came after President Donald Trump said he had a “very good” phone conversation with Chinese President Xi Jinping and that he would hold an “extended meeting” with him at the G-20 meeting. Trump had previously threatened to raise tariffs if Xi didn’t sit with him at next week’s meeting in Japan.

Chipmakers have been highly correlated to the trade issue, as the companies derive a hefty percentage of their revenue from China. The country is also a key part of their supply chains. Recently, semiconductor volatility rose after the Trump administration blacklisted Huawei, a major consumer to a number of semiconductor companies. Last week, Broadcom Inc. cut its full-year sales forecast because of trade risks and its Huawei exposure.

“Huawei casts a large shadow,” Stifel analysts wrote on Tuesday. “There is no getting around its significance.” Analyst Brian Chin lowered his estimates for a number of semiconductor companies for the second half of the year, saying that the industry’s “malaise” in May was “now too acute to ignore.”

That view was echoed by analysts at KeyBanc Capital Markets in a report dated June 17. The firm wrote that “the recent U.S./China trade war escalation, including the Huawei ban, has dashed hopes for a 2H recovery for broad-based semiconductors.” Analyst Weston Twigg added that a trip to Asia “left us more cautious” on the industry, and that there was an “increased risk to forward estimates” as the trade dispute “has led to a meaningful decline in bookings.”

Deutsche Bank analysts recently returned from an Asia trip of their own, emerging “more cautious on the semiconductor and semicap sectors” as a result, “especially given that the often promised H2 rebound is looking increasingly optimistic.”

Analyst Rob Sanders wrote that trade tensions were “significantly elevating uncertainty surrounding near- and mid-term business conditions,” and that “in most instances, this uncertainty is acting as a headwind to demand.”

The escalation in trade-related tensions came at a time when the industry has already been struggling with weak demand and high inventory levels. According to the Semiconductor Industry Association, total semiconductor sales sank 17.7% in April, its most recent month of data.

To contact the reporter on this story: Ryan Vlastelica in New York at rvlastelica1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Jennifer Bissell-Linsk, Richard Richtmyer

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