This Chip Company's Weak Outlook Is a Bad Omen for Semiconductors

(Bloomberg) -- Microchip Technology Inc. slid as a disappointing earnings outlook dimmed bets on a broad semiconductor rebound later this year.

The stock tumbled as much as 4.7 percent, before paring losses to 1.5 percent as of 10:16 a.m. in New York. The drop weighed on the Philadelphia Semiconductor Index, which fluctuated after a back-to-back slump.

Microchip’s results had been highly anticipated as the company called a bottom in the semiconductor cycle earlier this year, making the weak outlook particularly significant as analysts were hopeful it would further detail a potential recovery. After surging to record levels, chipmakers have recently trended lower amid weak sales data and cautious commentary from Intel Corp., ON Semiconductor Corp. and Texas Instruments Inc.

The results are “effectively dashing the 2H ‘snapback’ trade built into Semi stocks,” wrote Morgan Stanley’s Craig Hettenbach. “This earnings report is a negative catalyst and likely drives a reversal in the group.”

The industry has been under particular pressure this week due to uncertainty surrounding U.S. and China trade relations. The sector has heavy exposure to China, both in terms of its supply chain and with its geographic revenue footprint.

Craig Ellis, an analyst at B Riley FBR, credited the trade uncertainty for Microchip’s outlook.

“We suspect the team is guarding against recent U.S. announcements China tariffs could escalate sharply, muting trade flows and electronic product production and consumption,” he wrote in a note that affirmed his buy rating and $125 target on the stock.

Meanwhile, Raymond James appeared to downplay the significance of trade tensions -- though it noted that the issue remained a headwind.

The outlook “wasn’t materially different from most others in the space, and the prospect of higher tariffs only materialized over the last few days,” analyst Chris Caso wrote. It “isn’t likely evident in order patterns yet.”

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, Rita Nazareth

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