Semiconductor Winners And Losers At The Start Of Q4 2022 (Technical Analysis)

Oct. 04, 2022 3:25 PM ETADI, AMAT, AMD, ASML, ASX, AVGO, ENTG, INTC, KLAC, LRCX, LSCC, MCHP, MKSI, MPWR, MRVL, MU, NVDA, NXPI, ON, QCOM, QRVO, SLAB, SOXX, STM, SWKS, SYNA, TER, TSM, TXN, UMC, WOLF5 Comments
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Summary

  • Semiconductor stocks remain in a downtrend heading into Q4, but that does not mean some did not do much better than others.
  • An increasing number of semis are reporting weakening demand, which comes on the eve of a strong surge in semiconductor supply.
  • Some segments of the semiconductor market are holding up better than others, but for how long remains to be seen.
  • Semis have been weighed down by several headwinds all year and remain, suggesting semis will continue to struggle.

Black and silver computer microchips

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The semiconductor sector continues to struggle, but it also showed some positive signs heading into Q4 2022. Semis did not fall as much in Q3 as they did in Q2. In fact, some semis even managed to have a pretty good third quarter, something people may want to take note of. Nonetheless, the trend is still pointing down and conditions are likely to get worse for the semiconductor industry before they get better. Why will be covered next.

The trend remains bearish

Q3 was similar to the preceding Q2 in that semis ended both quarters on a low. However, losses in Q3 were smaller than in Q2. For instance, the iShares PHLX Semiconductor ETF (SOXX) has lost about 41% YTD, but only 5% in Q3. In comparison, the Invesco QQQ Trust (QQQ) has lost 33% and the SPDR S&P500 ETF (SPY) has lost 25% YTD.

Semis remain one of the worst-hit sectors in 2022. Semis did show improvement in Q3, which was made possible by getting off to a very good start in Q3. On the other hand, semis lost their early momentum to end the quarter on a weak note. SOXX, for instance, lost 14% in the month of September, wiping out all gains for the quarter and then some.

Furthermore, semis remain in a downtrend. The chart below shows how SOXX finished near the lower trendline of the descending channel after Q2, which is why a previous article suggested semis were likely due for a bounce heading into Q3. As it turned out, semis did bounce in July, only to fade as Q3 came to an end. Semis head into Q4 having reached new lows for the year. At the same time, they are oversold, so a bounce is possible after big losses in September, similar to what happened in Q3.

SOXX chart 1

Source: finviz.com

Still, the trend all year remains intact, which suggests SOXX is likely to reach new lows in Q4 as long as the trend remains unchanged. Note that semis were one of the biggest winners from the stock market rally in 2020-2021, which in turn was enabled in large part by massive fiscal and monetary stimulus worldwide. SOXX, for instance, more than tripled off the COVID-19 lows.

Most semis have yet to lose all these gains despite the big losses YTD. This suggests there is room for semis to go lower with the removal of the one factor that helped get semis to where they did. If, for instance, we take the March 2020 low of $176.66 and the December 2021 high of $555.63, then SOXX at $318.73 has fallen below the 61.8% Fibonacci retracement level at $321.43.

SOXX chart 2

Source: finviz.com

Support could be found at the next Fibonacci level at either 76.4% or 78.6%. The former is at $266.10, which is close to the pre-COVID19 high of $265.50 in February 2020. A 100% retracement to unwind the entire post-COVID19 rally back to $176.66 would require SOXX to lose another 45% of its current value, which gives you an idea of how much further the semiconductor sector could fall, in theory at least.

Which semis did better or worse

However, some semis have done better than others. A breakdown of SOXX by individual names makes this clear. The stocks included in SOXX are Texas Instruments (TXN), Broadcom (AVGO), Nvidia (NVDA), Qualcomm (QCOM), Advanced Micro Devices (AMD), Microchip (MCHP), ON Semiconductor (ON), Analog Devices (ADI), NXP Semiconductors (NXPI), KLA Corp (KLAC), Micron (MU), Applied Materials (AMAT), Marvell (MRVL), Lam Research (LRCX), TSMC (TSM), Intel (INTC), ASML (ASML), Monolithic Power Systems (MPWR), Skyworks (SWKS), Entegris (ENTG), Wolfspeed (WOLF), Teradyne (TER), STMicroelectronics (STM), Qorvo (QRVO), Lattice Semiconductor (LSCC), MKS Instruments (MKSI), Silicon Laboratories (SLAB), United Microelectronics Corporation (UMC), Synaptics (SYNA) and ASE Technology (ASX). The table below shows the gains or losses for each company.

Stock

Weight %

Change - 12 months

Change - 6 months

Change - 3 months

Change - 1 month

Change - YTD

TXN

8.85%

-19.47%

-15.64%

4.20%

-6.31%

-17.88%

AVGO

8.40%

-8.44%

-29.49%

-7.08%

-11.04%

-33.27%

NVDA

6.72%

-41.40%

-55.51%

-16.42%

-19.58%

-58.73%

QCOM

5.96%

-12.41%

-26.07%

-8.54%

-14.58%

-38.22%

AMD

5.11%

-38.43%

-42.05%

-13.99%

-25.34%

-55.97%

MCHP

4.50%

-20.48%

-18.78%

8.67%

-6.47%

-29.90%

ON

4.17%

36.18%

-0.45%

33.07%

-9.36%

-8.23%

ADI

4.12%

-16.80%

-15.64%

-2.50%

-8.04%

-20.73%

NXPI

4.10%

-24.69%

-20.30%

0.97%

-10.37%

-35.24%

KLAC

4.05%

-9.53%

-17.33%

2.15%

-12.06%

-29.64%

MU

4.04%

-29.42%

-35.68%

-6.62%

-11.37%

-46.22%

AMAT

3.98%

-36.36%

-37.84%

-5.03%

-12.91%

-47.93%

MRVL

3.85%

-28.85%

-40.16%

0.85%

-8.35%

-50.95%

LRCX

3.70%

-35.69%

-31.92%

-7.30%

-16.42%

-49.11%

TSM

3.68%

-38.59%

-34.24%

-10.96%

-17.74%

-43.01%

INTC

3.63%

-51.63%

-48.00%

-29.09%

-19.27%

-49.96%

ASML

3.50%

-44.26%

-37.82%

-7.67%

-15.22%

-47.83%

MPWR

2.46%

-25.02%

-25.18%

-0.42%

-19.81%

-26.34%

SWKS

2.20%

-48.25%

-36.02%

-6.42%

-13.48%

-45.04%

ENTG

1.99%

-34.06%

-36.75%

-6.06%

-12.50%

-40.09%

WOLF

1.97%

28.03%

-9.22%

63.75%

-8.91%

-7.52%

TER

1.89%

-31.16%

-36.44%

-12.41%

-11.21%

-54.05%

STM

1.37%

-29.09%

-28.41%

1.78%

-11.35%

-36.70%

QRVO

1.30%

-52.50%

-36.01%

-14.12%

-11.55%

-49.22%

LSCC

1.05%

-23.88%

-19.26%

8.68%

-8.70%

-36.14%

MKSI

0.72%

-45.24%

-44.91%

-14.20%

-17.04%

-52.55%

SLAB

0.68%

-11.93%

-17.82%

-3.86%

-1.51%

-40.20%

UMC

0.68%

-48.01%

-34.84%

-14.96%

-15.99%

-49.21%

SYNA

0.60%

-44.91%

-50.37%

-13.19%

-14.36%

-65.80%

ASX

0.52%

-36.43%

-29.62%

-0.40%

-13.37%

-36.11%

SOXX

-28.52%

-32.66%

-5.49%

-13.78%

-41.23%

QQQ

-25.34%

-26.28%

-5.27%

-10.70%

-32.82%

SPY

-16.77%

-20.91%

-6.31%

-9.62%

-24.80%

Source: iShares

Most semis tacked on losses in Q3, as did SOXX, but there were exceptions. WOLF, ON, LSCC, MCHP and a few others all bucked the trend by reducing their YTD losses in Q3. All remain in the red YTD at the start of Q4, but WOLF gained 64% and ON gained 33% in Q3, helping them narrow their YTD losses to about 8% to lead the way. They are also the only two out of the 30 companies above to have gained in the last 12 months. ON has gained 36% and WOLF has gained 28% after one year.

Yet none of the 30 stocks in SOXX is heading into Q4 with upwards momentum, including the aforementioned stocks. SLAB came closest by ending September with a loss of 1.5%. In contrast, AMD's 25%, NVDA's 20%, MPWR's 20% and INTC's 19% top the list of semis posting major losses in September. INTC, together with QRVO, are tops in terms of losses in the last 12 months, losing slightly more than half their value.

The semiconductor market continues to deteriorate

Semis have been negatively affected by a range of external factors all year, the withdrawal of monetary stimulus by the Fed and other central banks the most prominent one. However, industry-specific factors like a flaring up of trade restrictions between the U.S. and China and a worsening market for semiconductors in particular have also played a major role. INTC and QRVO, for instance, depend heavily on the PC and smartphone market respectively, two end markets where end-user demand has declined significantly, something the companies in question acknowledge.

A host of industry heavyweights have issued weak forecasts due to declining demand. For instance, quarterly guidance from MU at the end of September is forecasting a 45% YoY drop in revenue and a 98% drop in non-GAAP EPS, numbers that suggest significant stress in at least some segments of the semiconductor market, the DRAM and NAND market in this case. The latest report from MU bodes poorly for the upcoming earnings season.

On the other hand, market weakness is not uniform. Some end markets continue to hold up. Demand for automotive chips, for instance, continues to be strong. This helps explain the outperformance of stocks like ON and WOLF, both essentially automotive plays and electrical vehicles in particular. The overall market for semiconductors is still expanding.

According to WSTS, the semiconductor market is expected to grow by 13.9% YoY in 2022 after growing by 26.2% in 2021. The market is growing, but growth is decelerating with the market expected to grow by 4.6% in 2023. In addition, an increase in prices for semiconductors has exaggerated growth. China's imports of integrated circuits is a good example. In terms of unit volume, which is arguably a better representation of actual demand, Chinese imports declined by 12.8% YoY to 369.5B, but in terms of value, they rose by 3.1% YoY in the first eight months of 2022 to RMB1,806.9B, which shows what kind of impact higher prices had on the numbers.

While some companies expect a revival in flagging demand, there is reason to believe the market could begin to contract in the 2024-2025 timeframe. In addition, the weakening in semiconductor demand is set to coincide with a rapid rise in supply. Many of the fab projects initiated in the last several years due to the boom in semiconductor demand are expected to come online in the next 12-24 months, which will greatly increase the supply of many types of semiconductor chips.

While several countries are busy adding fab capacity with initiatives like the U.S. Chips and Science Act, nowhere is this more apparent than in China. For instance, China's SMIC has three new fabs that are scheduled to start production within the next 12-18 months, two of which can be labeled as gigafabs with a capacity of at least 100,000 12-inch wafers per month. SMIC recently broke ground on another gigafab, which will likely be ready for production in 24-36 months. Once all these fabs reach max capacity, semiconductor supply will greatly increase.

Most of this capacity seems to be targeted at mature nodes, which could spell trouble for the market for automotive chips since it relies heavily on trailing-edge process nodes. The shortage of automotive chips was triggered by foundries shifting resources elsewhere once automotive production was disrupted by COVID-19. These foundries are likely to shift resources back towards automotive chips now that other segments are struggling with demand. Weakness could thus spread to segments holding strong.

It's possible some of the worldwide expansion will be postponed or even canceled due to a worsening market, although a country like China has an incentive to keep adding capacity regardless. The decline in semiconductor demand in combination with a jump in supply is a cause for concern, one that could ultimately determine the shape of the road ahead for semis in the coming years.

Investor takeaways

If someone were to invest based on trends, then the existing one for the semiconductor sector leave little doubt as to what to do. Whether it's individual names like AVGO and ASML or exchange-traded funds ("ETFs") like SOXX, many are in a downtrend. Still, trends do not last forever and some may want to invest based on something else.

For example, if a combination of low valuations, solid growth and a generous dividend are important, then UMC may be it. Others may want to pick stocks based on some long-term industry trend like advanced packaging. In this case, ASX may be worth considering. Another group may want to stick with stocks that have outperformed, in which case ON stands out. Contrarians may be more interested in stocks like INTC that are down the most, betting on a rebound.

More risk-averse investors due to today's market may want to consider investing in long/short pairs, one that is expected to outperform and one that is expected to underperform. The former should be bought using the proceeds from the sale of the latter. AMD and INTC are prime candidates for this approach as they are direct competitors targeting the same markets.

However, anyone who decides to place bets on semis should be cognizant of changes underway in the market for semiconductors. There is an increasing disconnect between demand growth and supply growth, which does not bode well for semis in the next several years. The trend suggest semis as a whole are heading down and there is little out there to suggest that is about to change, a short-term bounce notwithstanding.

This article was written by

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