In this article, we will look at 10 semiconductor stocks to watch as shortage turns to glut. If you want to skip our analysis of the semiconductor industry and the major challenges it is facing, you can go directly to 5 Semiconductor Stocks to Watch as Shortage Turns to Glut.
The ‘Toilet Paper’ Problem
According to a Reuters report, while there is an ongoing chip shortage and lead times are still pointing to deliveries in 2023, some sectors do not require new chips as they have built excessive inventories over the past two years. Primarily catalyzed by the war in Ukraine and Covid-related lockdowns in China, consumer spending on certain products, especially electronics, saw a steep decline in June, the news agency reported. On July 15, the U.S. Census Bureau released data for monthly sales for retail and food services in June 2022. In June 2022, electronics & appliances stores registered a 9.1% decline year over year and were the retail category that dropped the most. With excessive lead times and a panicky situation related to the availability of semiconductors, manufacturers started hoarding chips. TechInsights’ chip economist Dan Hutcheson analogized the situation to how consumers around the globe stockpiled toilet paper ahead of a COVID-19 lockdown. With manufacturers’ inventories filled, the demand for semiconductors is reversing and what once was a shortage is now turning into a glut, in some sectors.
Analysts’ Take: Bullish Vs Bearish
Bernstein Research’s senior semiconductor analyst Stacy Rasgon recently spoke with CNBC in an interview in which he shared his insights about the current semiconductor market situation. While sharing positive views on semiconductor companies that supply the data center industry, Stacy Rasgon noted that the market for Android smartphones, and more particularly Chinese Android smartphones, is weak. Asked whether he is more bullish or less bullish on the semiconductor industry, Stacy Rasgon responded:
“So if you look at the space itself, multiples have compressed quite a bit, I mean they have come down about 40% from the peak that we saw at the beginning of January. Now a silver lining is that is as much or even more than we typically see in a typical like peak to trough kind of cycle…Broadly across the space, multiples have kind of normalized and we haven’t seen panic, but there are a few names that I could argue valuations do price in a little bit more panic.”
The analyst also noted that Advanced Micro Devices (NASDAQ:AMD) has an upper hand over Intel Corporation (NASDAQ:INTC) and said:
“There is a wonderful growth story there, they have got a lot of levers, that I think actually can carry things. They have just reiterated guidance at their analyst day and as it comes to Intel (NASDAQ:INTC), they (AMD) are absolutely killing it in the data center and Intel (NASDAQ:INTC) even basically admitted at their own analyst day that AMD is gonna run over them the next two years and maybe longer…”
The analyst also noted that the smartphone market is weak, especially in China, citing the Covid-related lockdowns in the region being a primary source for this weakness. Stacy Rasgon said:
“Especially android smartphones in China have been very very weak and have got even weaker recently as of some of the Covid lockdowns we have seen there so that is just a market that has not been great and anything touching that market (is bad)”.
Jefferies tech sector specialist, Jared Weisfeld, was recently interviewed by CNBC in which he shared his insights on the technology sector and where he thinks investors should put their money in the event of a recession. Asked where he thinks investors should invest their money within the tech sector, Jared Weisfeld said:
“You are seeing some of the more cyclically sensitive areas within tech completely break down. Semis, for instance, if you look at the stocks relative to the SPX, we are sitting at fresh lows as there are broader concerns about going into a recession. We are certainly advocating, from a portfolio strategy standpoint, to move away from semis towards more of the growth areas in the broader market. When you start looking at structural growth in software, we certainly think there are more opportunities in those sectors.”
Asked if he sees the software sector as being more recession-proof and resilient to a rising rate environment than the semiconductor sector, Jared Weisfeld said:
“During recessionary times, there is gonna be scarcity in value with respect to growth and software is certainly going to outperform more cyclically sensitive sectors such as semis”
Jared Weisfeld further strengthened his bearish view on the semiconductor industry by noting that he forecasts a decline in the global PC market this year amid rising interest rates. He said:
“I think PCs are one of the best examples. We were shipping 260 million PCs globally pre-covid. That ballooned to 340 million post-covid as we were having multiple PCs per household when everyone was working from home. That market’s gonna decline about 10% this year… From a semiconductor standpoint, it becomes a little bit difficult for outperformance when some of these key end markets are going to decline so significantly this year.”
Enterprise software spending and the demand for data center infrastructure are expected to remain robust, even in a recessionary environment, as suggested by expert analysts. Semiconductor companies that analysts are bullish on because of their exposure to the data center market include NVIDIA Corporation (NASDAQ:NVDA), Advanced Micro Devices, Inc. (NASDAQ:AMD), and QUALCOMM, Incorporated (NASDAQ:QCOM).
Photo by L N on Unsplash
Our Methodology
To determine the 10 semiconductor stocks to watch as shortage turns to glut, we looked for semiconductor companies whose end-markets are prone to see deteriorating demand in a rising rate environment and from the fear of a recession. These end markets typically fall under the consumer discretionary sector, such as automobiles and consumer electronics. We narrowed down our selection to stocks that had bearish analyst sentiment and saw price target cuts and downgrades in recent months. To give our readership a clearer picture of each stock, we reviewed analyst ratings from the past 3 months and mentioned how many buy-side, sell-side, and neutral ratings each stock has received.
Along with each stock we have also mentioned the hedge fund sentiment around it and have ranked our picks in increasing order of hedge fund holders.
10 Semiconductor Stocks to Watch as Shortage Turns to Glut
10. indie Semiconductor, Inc. (NASDAQ:INDI)
Number of Hedge Fund Holders: 17
YTD Loss as of July 15: 48.67%
Analysts are bearish on indie Semiconductor, Inc. (NASDAQ:INDI) and see the company facing demand troubles ahead. The company provides automotive semiconductors and software solutions for advanced driver assistance systems, connected cars, user experience, and electrification applications. On June 15, B. Riley analyst Craig Ellis downgraded indie Semiconductor, Inc. (NASDAQ:INDI) to Neutral from Buy and slashed his price target to $8 from $9. Ellis said he sees a “demand destruction risk” from declining consumer demand, soaring energy prices, and rising input costs.
Over the past 3 months, 4 Wall Street analysts have rated and given their 12-month price targets on indie Semiconductor, Inc. (NASDAQ:INDI). The stock has received 3 Buy ratings and 1 Hold rating. The stock’s average price target of $11.50 implies a 91.67% upside from its closing price on July 15 of $6. The stock has a high price target of $17 and a low price target of $8.
At the end of Q1 2022, 17 hedge funds disclosed ownership of stakes in indie Semiconductor, Inc. (NASDAQ:INDI) and held stakes worth $56.15 million in the company. This is compared to 15 positions in the preceding quarter with stakes worth $78.36 million. The hedge fund sentiment for the stock is negative.
As of June 30, P.A.W. CAPITAL PARTNERS is the top shareholder in indie Semiconductor, Inc. (NASDAQ:INDI) and has stakes worth $3.42 million in the company.
Some of the semi stocks that are expected to drive outperformance in a recessionary environment include NVIDIA Corporation (NASDAQ:NVDA), Advanced Micro Devices, Inc. (NASDAQ:AMD), and QUALCOMM, Incorporated (NASDAQ:QCOM).
9. Wolfspeed Inc. (NYSE:WOLF)
Number of Hedge Fund Holders: 27
YTD Loss as of July 15: 37.79%
Wolfspeed Inc. (NYSE:WOLF) develops wide bandgap semiconductors for power and radio frequency applications such as transportation, power supplies, power inverters, and wireless systems. Over the past 3 months, 12 Wall Street analysts have given their price targets and ratings on Wolfspeed Inc. (NYSE:WOLF). The stock has received 5 Buy ratings, 6 Hold ratings, and 1 Sell rating. The stock has an average price target of $95 which implies an upside of 26.43% from its closing price on July 15 which sits at $75.36. The stock has a high price target of $130 and a low price target of $69.04.
Analysts are bearish on Wolfspeed Inc. (NYSE:WOLF) and see the stock underperforming in a rising rate environment. On July 14 JPMorgan analyst Samik Chatterjee slashed his price target on Wolfspeed Inc. (NYSE:WOLF) to $80 from $105 and reiterated a Neutral rating on the shares. On June 29, BofA analyst Vivek Arya trimmed his price target on Wolfspeed Inc. (NYSE:WOLF) to $75 from $95 and reiterated an Underperform rating on the shares.
At the close of Q1 2022, 27 hedge funds disclosed ownership of stakes in Wolfspeed Inc. (NYSE:WOLF) and held stakes worth $225.73 million. This is compared to 34 hedge funds in Q4 2021 with stakes of $432.56 million. The hedge fund sentiment for the stock is negative.
Even though analysts are cutting their price targets across the semiconductor industry, analysts are still bullish on some semi stocks because of their respective end markets. These names include NVIDIA Corporation (NASDAQ:NVDA), Advanced Micro Devices, Inc. (NASDAQ:AMD), and QUALCOMM, Incorporated (NASDAQ:QCOM).
8. Semtech Corporation (NASDAQ:SMTC)
Number of Hedge Fund Holders: 31
YTD Loss as of July 15: 38.80%
Semtech Corporation (NASDAQ:SMTC) develops, manufactures, and markets analog and mixed-signal semiconductor products. Semtech Corporation (NASDAQ:SMTC) is a semiconductor stock on investors’ radars as they see declining demand in its end markets. On June 15, B. Riley analyst Craig Ellis slashed his price target on Semtech Corporation (NASDAQ:SMTC) to $65 from $87 and downgraded the stock to Neutral from Buy, citing “demand destruction risks” due to rising input costs and a declining market for consumer electronics.
9 Wall Street analysts have rated and offered their price targets for Semtech Corporation (NASDAQ:SMTC) over the past 3 months. The stock has received 7 Buy ratings and 2 Hold ratings. The average price target for the stock sits at $81, which implies a 47.49% upside from its closing price on July 15 of $55.07. The stock has a max price target of $95 and a min price target of $58.
At the end of Q1 2022, 31 hedge funds were long Semtech Corporation (NASDAQ:SMTC) with stakes worth $423.45 million. This is compared to 26 positions in the preceding quarter with stakes of $307.75 million.
As of March 31, Millennium Management is the largest shareholder in Semtech Corporation (NASDAQ:SMTC) and has stakes worth $109.29 million in the company.
7. Ambarella, Inc. (NASDAQ:AMBA)
Number of Hedge Fund Holders: 32
YTD Loss as of July 15: 68.43%
Ambarella, Inc. (NASDAQ:AMBA) develops semiconductor solutions for video compression, image processing, and deep neural network processing worldwide. Ambarella, Inc. (NASDAQ:AMBA) is another semiconductor stock on investors’ and analysts’ radars that they see headwinds for. On June 29, BofA analyst Vivek Arya trimmed his price target on Ambarella, Inc. (NASDAQ:AMBA) to $75 from $85 and reiterated an Underperform rating on the shares.
13 Wall Street analysts have given their ratings and price targets on Ambarella, Inc. (NASDAQ:AMBA) over the past 3 months. The stock has received 11 Buy ratings, 1 Hold rating, and 1 Sell rating. The stock’s average price target of $119 implies a 74.16% upside from its closing price on July 15 of $68.24. The stock has a high price target of $150 and a low price target of $75.
At the close of Q1 2022, 32 hedge funds were long Ambarella, Inc. (NASDAQ:AMBA) with stakes worth $319.29 million. This is compared to 40 positions in the preceding quarter with stakes worth $831.74 million. The hedge fund sentiment for the stock is negative.
As of June 30, P.A.W. CAPITAL PARTNERS is the largest shareholder in Ambarella, Inc. (NASDAQ:AMBA) with stakes worth $1.63 million.
Here is what Carillon Tower Advisers had to say about Ambarella, Inc. (NASDAQ:AMBA) in its first-quarter 2022 investor letter:
“Ambarella (NASDAQ:AMBA) supplies video processing and computer vision chips used in the security and automotive markets. The company continues to face supply headwinds from its foundry partner despite robust market demand for Ambarella’s products.”
6. Qorvo, Inc. (NASDAQ:QRVO)
Number of Hedge Fund Holders: 33
YTD Loss as of July 15: 37.16%
Qorvo, Inc.’s (NASDAQ:QRVO) major customers are Chinese smartphone manufacturers including Honor, OPPO, Xiaomi, and Vivo. As Stacy Rasgon, senior semiconductor analyst at Bernstein Research, pointed out that anything touching the Chinese smartphone market is “bad” and that the smartphone market is weak, Qorvo, Inc. (NASDAQ:QRVO) is one of the semiconductor stocks that can face demand problems and surplus issues.
On July 15, Goldman Sachs analyst Toshiya Hari cut his price target on Qorvo, Inc. (NASDAQ:QRVO) to $107 from $126 and reiterated a Neutral rating on the shares. On July 11, Cowen analyst Matthew Ramsay downgraded Qorvo, Inc. (NASDAQ:QRVO) to Market Perform from Outperform and slashed his price target on the shares to $108, from $150. Ramsay noted that he sees macro headwinds for the smartphone market in 2022 and 2023, and he is forecasting global smartphone shipments to contract by 6% year-over-year in 2022.
Over the past 3 months, 19 Wall Street analysts have offered their ratings and price targets on Qorvo, Inc. (NASDAQ:QRVO). The stock has received 8 Buy ratings, 10 Hold ratings, and 1 Sell rating. On the high end, the stock has a price target of $180, and on the low end, the stock has a price target of $95. The stock’s average price target, which nears $130, implies a 29.36% upside from its previous close of $100.18 on July 15.
At the close of Q1 2022, 33 hedge funds disclosed ownership of stakes in Qorvo, Inc. (NASDAQ:QRVO) and held stakes worth $1.51 billion. This is compared to 44 positions in the previous quarter with stakes worth $2.15 billion. The hedge fund sentiment for the stock is negative.
As of March 31, Seth Klarman’s Baupost Group is the most prominent stakeholder in Qorvo, Inc. (NASDAQ:QRVO) and has stakes worth $824.73 million in the company.
Vulcan Value Partners mentioned Qorvo, Inc. (NASDAQ:QRVO) in its first-quarter 2022 investor letter. Here is what the firm said:
“Qorvo Inc. is one of the two major providers of radio frequency RF systems which are critical components of mobile devices including smart phones and the Internet of Things (IoT). Two transitory concerns have recently affected the company’s stock price. First, supply chain issues continue to be a constraint. Second, Apple recently announced its decision to decrease production of its iPhone SE model. Neither of these issues threatens their long-term competitive position. Qorvo’s value is stable and despite the recent pressure on the stock price, we feel its long-term prospects are promising.”
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Disclosure: None. 10 Semiconductor Stocks to Watch as Shortage Turns to Glut is originally published on Insider Monkey.
