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Motley Fool Issues Rare “All In” Buy Alert
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Shares of leading semiconductor companies Taiwan Semiconductor Manufacturing (TSM -2.68%), Intel (INTC -2.10%), and Qualcomm (QCOM -3.17%) all fell today, declining 2.9%, 2.6%, and 3.6%, respectively, as of 3:37 p.m. ET.
The synchronous moves likely had to do with the same broader macroeconomic forces and sector news. First, widespread protests in China over COVID-19 restrictions erupted this past weekend, putting pressure on any stock with exposure to China or products made there. Second, a report from a leading tech industry research company predicted a bigger decline in overall semiconductor revenue next year than it had forecast just four months ago.
On Monday, research industry watcher Gartner came out with its annual forecast for the 2023 semiconductor industry. In the report, Gartner forecast an overall industry decline of 3.6% in 2023 to $596 billion, after an estimated 4% growth in 2022, following the 26.3% growth seen in 2021. The findings mark a striking revision from Gartner’s prior $623 billion 2023 forecast given in July, when it anticipated 7.4% growth this year and then just a 2.5% decline in 2023.
Gartner Vice President Richard Gordon explained, “The short-term outlook for semiconductor revenue has worsened. Rapid deterioration in the global economy and weakening consumer demand will negatively impact the semiconductor market in 2023.”
Certainly, high inflation and rapid interest rate increases are weighing on purchases of consumer electronics, especially as consumers loaded up on PCs and smartphones during the pandemic in 2020 and 2021.
In addition, an especially large decline in demand is coming from China this year, as widespread COVID-related lockdowns, a crackdown on the country’s technology sector, and the pop of China’s real estate sector are all conspiring to sap consumer confidence and limit demand from Chinese consumers and businesses, which have been a big source of global chip demand.
This past weekend, widespread protests broke out in China against the country’s “zero-COVID” policy. Under that policy, China had resorted to strict lockdowns of entire cities in order to control local omicron variant outbreaks, which have surged since October. However, as these have been going on since March, it appears a wide swath of Chinese citizens have had enough.
More specifically, unrest over COVID-19 at Apple supplier Foxconn’s Zhengzhou plant this past weekend caused a shutdown in iPhone production, which could hurt iPhone sales during the busy holiday shopping season. TF International Securities’ Ming-Chi Kuo estimated that 10% of iPhone production is affected by the unrest, and Wedbush analyst Dan Ives said Apple is losing $1 billion a week in iPhone sales as long as the plant is shut down as a result.
That could affect revenue for Taiwan Semi and Qualcomm this quarter, as TSMC manufactures the Bionic iPhone processor and Qualcomm supplies the iPhone’s modem.
The semiconductor industry, which is prone to booms and busts, is in the midst of a downturn. However, the decline could be an opportunity for long-term investors to buy these stocks on the cheap, with an eye toward an eventual recovery in 2024. After all, that’s what Warren Buffett recently did in buying TSMC stock last quarter.
However, investors should make sure the stocks they buy can survive the current bust. For instance, while Intel may look very compelling from a valuation standpoint, it is trying to pull off a very tricky and expensive turnaround, made all the more difficult by the current PC bust. Recently, Intel has experienced some setbacks, making its outlook over the long term much murkier.
One silver lining in the Gartner report is that while the overall semiconductor industry is projected to decline 3.6% next year, the memory industry, which accounted for about 25.8% of 2022 semi industry sales and is even more cyclical than the overall chip industry, is projected to decline 16%. That leaves non-memory sales growing about 1% next year, according to Gartner’s predictions.
Furthermore, Gartner expects consumer electronics to continue to be weak next year, but for enterprise spending on semis to be stronger, as organizations continue to invest in digital transformation. So, for those looking to buy this dip in semis, non-memory chip companies with high exposure to enterprise and industrial applications may be the best places to look.
Billy Duberstein has positions in Apple and Taiwan Semiconductor Manufacturing and has the following options: short January 2023 $210 calls on Apple. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Apple, Intel, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Gartner and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, long March 2023 $120 calls on Apple, short January 2025 $45 puts on Intel, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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