Pessimism on chip stocks is hitting a new high, and the money seems to be flowing toward software


The outlook for the semiconductor industry is going from bad to worse, and as a result, it looks like investors are shifting their money to the software industry.

Pessimism about the future of the chips sector has been growing after a mixed round of forecasts in the second quarter, with analysts pointing out that the pandemic-driven sales momentum amid supply problems may dry up. They fear that customers have bought in excess during the supply chain frenzy, which would lead them to stop shopping because they already have inventory and are starting to see signs that it is happening.

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Mizuho analyst Jordan Klein and Bernstein analyst Stacy Rasgon have been checked this week with notes showing their doubts that the chip sales boom will continue next year.

“It looks worse to have been on the buying side all year,” Klein wrote in a note Friday. “Everyone is super negative and cautious based on checks in Asia suggesting that memory prices are falling, that supply chains for smartphones and computers are shrinking as inventories increase and demand / orders slows “.

“While data center / server and automotive supply chains sound good, it seems like few want to buy / add these stocks for fear that weakness elsewhere will hurt all feelings and valuations,” Klein said. . “And if capex spending in the cloud is reduced, it could end the game for some of the semi-liked and owned names like Marvel Technology Inc. MRVL,
+ 2.91%,
Advanced Micro Devices Inc. AMD,
+ 5.05%,
Nvidia Corp. NVDA,
+ 4.23%
pointing to the data center “.

Rasgon wrote Tuesday that “it looks like investors are waiting for someone to blink,” as Wall Street awaits confirmation from some chip makers in the upcoming earnings season that sales will suffer from the existence of overbought.

The “maximum cycle” debate and “stronger for longer” is no longer a debate with multiple collapses amid double-edged concerns, consumer weakness, inflation, macro and new headwinds (Shanghai, Ukraine, and so on). ), and investors are now actively looking to estimate cuts, ”Rasgon said.

Reads: The end of the wonders of a chip: why the ratings of Nvidia, Intel and AMD have experienced a massive upheaval

Klein tracked the divestment of chips in the software sector, noting that software stocks have recovered considerably better than chip stocks from the broad sell-off in the first half of June. Klein said he is seeing a “big rotation” of chip stocks, following a rotation of energy and materials stocks.

For the past 31 days, the IGV ETF in the iShares technology software sector,
+ 3.40%
increases more than 6%, while the PHLX Semiconductor SOX index,
+ 3.60%
it has fallen by more than 4% in the same period. So far this year, the IGV has fallen by 28% and the SOX index has fallen by more than 31%.

In comparison, the Energy Select Sector SPDR ETF XLE,
+ 1.94%
has fallen nearly 15% over the past 31 days, although it is the only ETF in the State Street SPDR sector to be in positive territory during the year, with a gain of 30%. Similarly, the Materials Select Sector SPDR ETF XLB,
+ 3.53%
has fallen 9% in the last 31 days, but unlike energy, the materials ETF has fallen almost 17% during the year.

“How much of that is really an actual purchase is still at stake,” Klein noted. “It feels a lot tighter as interest rates have retreated and the growth factor works compared to the winners of inflation.”

Mizuho’s cash table, however, on Thursday saw a key trend of “real-size selling” of energy stocks and some “real buying of high-growth software.”

“I’m not sure if it’s money coming into the software for fear of a higher sustained movement in the industry or just more dumping semis waiting for poor guides and confirmation that demand / orders are slowing,” he said. Klein wrote, adding that recent talks over the past week indicate that investors are turning even more negative about chip stocks.

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On Tuesday, Morgan Stanley resumed AMD coverage with an overweight rating, now that the investment firm has finished advising Xilinx after its acquisition by AMD, but that optimism did not extend as much to other chip manufacturers. For its part, on the day of AMD analysts two weeks ago, the chip maker maintained its outlook issued in May and said it expects average annual growth of about 20% over the next three or four years.

This latest season of earnings Intel Corp. INTC,
+ 2.67%
doubled its bullish forecasts for 2022 although the current quarter shows signs of weakness. And on Wednesday, Intel delayed its opening ceremony for its Ohio plant, as it appears that enthusiasm in Congress to support the chip industry appears to have waned.

Reads: Intel wins last race in using chips for the cloud, says KeyBanc Capital Markets

QCOM from Qualcomm Inc.,
+ 3.28%
The outlook was bullish, but analysts could see short-term support given the strength of its mobile phone business. Nvidia cut its outlook due to China’s closures and lost revenue to Russia due to the war in Ukraine, and Wall Street took it as the long-awaited “cut” for stocks. Cisco also issued a poor outlook due to China’s closures and stocks saw their worst day in more than a decade.

Chip equipment suppliers were less optimistic because of the ongoing supply chain problems that held them back. This was the case with the Applied Materials Inc. AMAT,
+ 3.49%,
ASML Holding NV ASML,
+ 5.32%,
Lam Research Corp. LRCX,
+ 5.27%,
and KLA Corp. KLAC,
+ 4.88%



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