Shares of top chipmakers are trending down after the world’s largest independent semiconductor foundry, Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial), issued weak guidance following the announcement of its most recent quarterly results.
The company cited weakening demand from its mobile customers, primarily Apple Inc. (AAPL, Financial), as one of the reasons for its weak revenue outlook for the year. Apple, which is reportedly working with suppliers to launch a foldable iPhone by 2020, has experienced a slowdown in its flagship smartphone recently.
The company revised its revenue target for the year downward to the low end of its earlier forecast. It now expects 2018 revenue to grow 10%, compared with its prior forecast of 10% to 15% growth. The company also said it now expects the semiconductor industry to grow by 5%, down from its initial forecast of 5% to 7%. Revenue at contract chipmakers was also revised downward to a projected growth of about 8%, compared to the earlier forecast of 9% to 10% growth.
This spooked investors, resulting in what has been a major selloff in the semiconductor industry. Shares of Intel Corp. (INTC, Financial), Micron Technology Inc. (MU, Financial), Broadcom Inc. (AVGO, Financial), ON Semiconductor Corp. (ON, Financial) and Cypress Semiconductor Corp. (CY, Financial) fell more than 5% from their closing prices on Wednesday.
The sentiment behind the present pullback is that since Taiwan Semiconductor issued weak guidance, citing concerns on mobile chip shipments, other companies are likely to end up in the same boat sooner or later.
Analysts have attributed the subdued outlook for the semiconductor industry to weakening iPhone demand, but should this really be causing such a major selloff in the market? Is the exposure to the iPhone’s weakening demand that significant? Not by a long shot. For instance, ON Semiconductor and Cypress Semiconductor each have an exposure of less than 5%, yet their shares have fallen 7.5% and 6.3% respectively since April 18.
On the other hand, Intel and Micron have less than 10% exposure to Apple’s iPhone demand. They are both down about 5% over the last two days.
Intel and Cypress Semiconductor both report their first-quarter 2018 results on April 26, while ON Semiconductor is scheduled to announce at the end of the month. Micron Technology's most recent quarterly results were in February—the next announcement will take place in May. Since the next round of earnings announcements are swiftly approaching for these companies, investors might be getting anxious over what might happen.
From a valuation perspective, the current pullback could be an opportunity to gain exposure to some of the top players in the semiconductor industry. For instance, shares of Intel now trade at a price-earnings ratio of just 16 times, compared to its year-to-date average of approximately 25 times. This is clearly an opportunity to pounce should the stock rebound to trade close to its average price-earnings ratio.
Micron Technology’s price-earnings multiple of just 6 times also looks attractive compared to its current annual average of 7.5 times, which again suggests the selloff might well be overblown.
On the other hand, ON Semiconductor has performed impressively on both revenue and net income recently, posting significant growth. Broadcom has also had good performance with trailing 12-month net income of $7.7 billion on approximately $18.8 billion in revenue.
Currently, Intel has a consensus earnings per share forecast of $3.54 for calendar year 2018, which is a massive improvement from last year’s figure of $1.98. Micron Technology, on the other hand, has an earnings forecast of $10.85 per share for the current year, up from $6.39 last year.
So unless Intel and Micron both miss estimates by a huge margin, investors should be expecting an improvement in earnings come the end of the year. When you look at the consensus estimates for both stocks, improvements should be massive, which should outweigh any lingering fears about weakening iPhone demand.
In summary, while Apple has been facing a huge challenge to increase iPhone sales year over year following its most recent update on its flagship product, its suppliers shouldn’t worry about how that is going to affect their sales going forward. Blockchain technology has opened the doors to new applications, which has created a market for chipmakers. As a result, Taiwan Semiconductor should focus on growing its blockchain revenue stream to complement weaknesses in high-end smartphone demand.
If ON Semiconductor, Micron Technology, Broadcom, Intel and Cypress Semiconductor follow the same path, then investors shouldn’t read too much into the current semiconductor selloff.
Disclosure: I have no positions in the stocks mentioned in this article.
