Semiconductor Sector Gains Momentum On China Trade Deal Hope

This year the semiconductor sector has outperformed the broader market with the hope of a China trade deal. This deal has many expecting an end to tariffs as well as boost the world economy.

Semiconductor Stocks Gaining

Chip stocks on Tuesday sold in a wider market decline which saw tech companies such as Facebook Inc. (FB) and Apple (AAPL) hold onto gains.  Since the Christmas Eve market sell-off, the S&P tech sector saw a record high on Monday gaining about 33%[1] Semiconductor stocks have been outperforming in the technology sector.

For instance, VanEck Vectors Semiconductors ETF (SMH) has increased 3% of its all-time high and it is close to its 52-week high. Although on Tuesday it lost 1% it is still up around 28% year to date [2].

Analysts indicate that according to Refinitiv data, chip stocks have gained this year although they expect industry earning to decline by 20% in Q1 2019 and continue for the rest of the year.  The analysts indicate that chip companies are likely to offer weaker guidance because of a decline in demand from smartphones, PCs, and cars. However, chip stocks are likely to a turnaround in the second half of the year.

“They certainly have ground to give up, and that’s what gets dangerous. When you come into the earnings season with the kind of momentum we’ve seen in some of these high-flying names … whether it’s Nvidia or Micron … unfortunately you’re on a knife’s edge and there’s a potential for a great deal of volatility.”

Art Hogan, chief market strategist at National Securities

Decline In Earnings For Chips & Semiconductors

According to Refinitiv, earnings of chip companies could drop by 16.5% in the first quarter, 20.8% in the second quarter and 18.4% in the third quarter [3]. On the other hand, semiconductor companies expect a 36.4% decline in revenue in the first quarter, which will also be experienced in the second quarter. However, the drop in the fourth quarter will be nearly 4%. 

AlphaOne Capital Partners founder, Dan Niles said that memory prices could continue to decline as demand shrinks and it will be hard to see stock sit at their all-time high knowing that earnings will decline by 25% by the end of the year.

Oppenheimer analysts, in a note, said semiconductor shares remain sharply higher despite the “raft of estimate cuts” year to date. “We attribute much of the move to hopes for a U.S./China trade deal and 2H fundamental inflection. Near-term visibility remains poor and 2Q expectations appear low, in our view. We remain stock selective.”

The Oppenheimer analysts said their top picks are Broadcom (AVGO), Nvidia (NVDA), Marvell Technology (MRVL) and Monolithic Power Systems. (MPWR)

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