In this piece, we will take a look at the top ten short semiconductor stock positions among institutional investors according to Jefferies.
With the third quarter earnings season with us, the semiconductor industry continues to be filled with surprises. 2023 and the better part of 2024 have seen investors remain bullish about chips due to the increased market size resulting from artificial intelligence. Yet–at the same time–the pipers of Wall Street have also been wary of over-investing in artificial intelligence and the state of the broader chip manufacturing industry apart from the fortunes of the AI industry.
For the latter front, October has been quite eventful. It once again reminded us that even the firms closest to a monopoly these days aren’t immune from either macroeconomic headwinds or from worried investors. It saw the shares of the most important company in the semiconductor industry tank by a stunning 21.64% in just two days after a rather interesting set of events.
This stock ranked 8th on our recent list of AI stocks that were trending in the news and this was unsurprising. It was due to report its earnings on October 16th, but the report ended up leaking a day earlier. Earnings leaks are a serious matter, and even more so for this firm since its business provides investors with early insight into the affairs of the semiconductor industry ahead of an earnings cycle for other firms.
The leaked earnings saw the firm guide its 2025 net sales at a midpoint of €32.5 billion as it warned that the weakness in the semiconductor industry “is expected to continue in 2025, which is leading to customer cautiousness.” Since its machines are booked months in advance, the firm has a greater insight into its future cash flows than others, and investors were further spooked by its bookings. The bookings sat at €2.6 billion as of the third quarter, for a wide miss over midpoint analyst estimates of €5 billion.
Consequently, investors weren’t impressed. The day that the earnings report leaked, the shares dropped by 16% for their biggest one-day drop in more than two decades. They continued their downward spiral the following day to close 6.42% lower and extend the two-day cumulative drop to 21.64%. While these drops might seem to be a bit too much since after all, you don’t see multi-decade records get broken every day, they stem from the uncertainty that investors have to contend with when analyzing complex industries such as semiconductor fabrication.
Broadly speaking, the semiconductor industry is divided into three tiers. Starting from the top, firms like GPU and CPU designers are responsible for selling products to consumers and businesses. The second tier is made of manufacturers which produce the chips and the third is made of firms that provide the manufacturing equipment. Consequently, the fact that the chip manufacturing equipment provider’s downbeat revenue guidance wiped off billions of dollars of capital from the semiconductor industry was unsurprising.
As per Bloomberg, following the bookings miss and lower guidance, US-listed chip stocks, and Asian stocks bled a collective $420 billion in value. Michael Roeg, an analyst at investment bank Petercam Degroof provided more color into the drop. After the release, he shared that sales trends at the world’s largest contract chip manufacturer “are a misleading indicator for the overall health of the semiconductor industry.” This is because the firm “has been spending rather low capex numbers so far this year, and they may do so again next year because their overall (plant) utilization is not as good as their sales numbers suggest.”
Utilization refers to the percentage of time that expensive chip machines are running and producing chips and fabs prefer to have high rates since it decreases the time it takes for them to recuperate their investment. Low capital expenditure affects utilization since if utilization is low then chip manufacturers do not feel the need to spend heavily for new machines. In sum, these trends mean that semiconductor spending at the bottom tier of the industry remains muted unless demand picks up and utilization grows.
Shifting gears, the top tier of the industry is divided into several categories. One category includes firms like Wall Street’s favorite AI stock, the GPU designer whose shares are up 198% year-to-date. Due to the market’s rush into AI, while investors have been kind to this firm, they have been far more prudent for others. One such firm is responsible for manufacturing silicon carbide chips that are used for power management by electric vehicles. Since the demand for EV vehicles has slowed, leading to the shares of Elon Musk’s car company losing 12.3% year to date, the shares of this firm haven’t done well either. They are down 18.3% year to date, and if you’re interested in knowing more about this stock, we’ve included it in today’s list.
This overall bifurcation in the semiconductor industry hasn’t skipped the attention of institutional investors. According to Jefferies’ October Trading Positioning Survey, the percentage of investors overweight on semiconductor stocks was 42%, a strong 18-point drop over July’s figures. The funds that were underweight on these stocks grew by five points from July to sit at 16%, so let’s take a look at the stocks that they have shorted.
A close-up of a state-of-the-art semiconductor wafer foundry.
Our Methodology
To make our list of Jefferies’ top overcrowded semiconductor short positions, we ranked the top ten crowded short positions from the latest Trading Positioning Survey by their shares short as a percentage of outstanding shares.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
10. ASML Holding N.V. (NASDAQ:ASML)
Number of Hedge Fund Holders In Q2 2024: 81
Shares Short % Of Outstanding: 0.27%
ASML Holding N.V. (NASDAQ:ASML) is the semiconductor equipment manufacturing stock that we discussed in our introduction. It makes and sells the most advanced chip manufacturing machines in the world, and consequently, the firm’s hypothesis depends on the health of the broader chip manufacturing industry. ASML Holding N.V. (NASDAQ:ASML) enjoys a wide moat in the industry since it is the only company in the world that supplies EUV and High NA EUV machines. These are indispensable for making the most advanced chips in the world. Yet, as was evident by the recent 21.64% share price drop, ASML Holding N.V. (NASDAQ:ASML)’s narrative depends on spending by semiconductor manufacturing firms such as TSMC and Intel. Consequently, with slower spending now priced in the stock, any improvement in smartphones and other sectors to drive up non-AI chip production could help the firm.
ASML Holding N.V. (NASDAQ:ASML)’s management commented on the state of the semiconductor industry during the Q3 2024 earnings call. Here is what they said:
“All-in-all, we have seen continued momentum EUV technology and we are progressing well relative to customer expectations. With regards to market condition, while we continue to view AI as a key driver of the industry recovery with potential upside, we see other segments recovering more slowly than anticipated. The recovery will extend well into 2025, which is leading to customer cautiousness and some push outs in their investment. In logic, the slow recovery of end markets such as mobile and PC, together with specific competitive foundry dynamics, as resulted in a slower ramp of new nodes at certain customer who are as a results pushing out some of their fabs and changing their litho demand timing. In memory, the slower market recovery is also resulting in limited capacity addition with the focus still on technology transition, supporting the high bandwidth memory and DDR5 AI related demand.
And finally, we expect the China business to go back to a more normalized percentage of our business in line percentage of China business in our backlog. In summary, while the long-term trends are still very strong and positive, the developments over the past few months combined with customer specific circumstances has led to a reduced growth curve in 2025 and an over overall reduction of our lithography demand. Due to this dynamics over the last quarter, we felt it’ll be appropriate to make some comments on 2025 at this time versus waiting until our Investor Day next month.”
9. Applied Materials, Inc. (NASDAQ:AMAT)
Number of Hedge Fund Holders In Q2 2024: 77
Shares Short % Of Outstanding: 1.97%
Applied Materials, Inc. (NASDAQ:AMAT) provides semiconductor manufacturing equipment and process optimization products that help firms like Intel and TSMC to make chips. It is one of the biggest companies of its kind, and consequently, enjoys volume-driven margins. Yet, just as is the case with ASML, Applied Materials, Inc. (NASDAQ:AMAT)’s scale also means that it is at the mercy of the broader semiconductor production industry. As a result, the stock is up by a modest 18.6% year to date and has lost 28.3% since its July peak. Part of the reason Applied Materials, Inc. (NASDAQ:AMAT) has struggled this year is because of the impact of US sanctions on China for chip manufacturing equipment. During the firm’s fiscal Q3, China accounted for 32% of Applied Materials, Inc. (NASDAQ:AMAT)’s revenue, a sizeable drop from Q2’s 43%. However, the firm is responsible for providing key technologies for advanced chip manufacturing techniques such as gate all around (GAA) and 2 nanometers which place it well for future up cycles in the chip industry.
Parnassus Investments mentioned Applied Materials, Inc. (NASDAQ:AMAT) in its Q2 2024 investor letter. Here is what the fund said:
“Applied Materials is the world’s largest supplier of wafer fabrication technologies used in semiconductor manufacturing. The company reported solid earnings for the quarter, and investors believe Applied Materials should continue to benefit from accelerated industry spend due to AI and share gains.”
8. Texas Instruments Incorporated (NASDAQ:TXN)
Number of Hedge Fund Holders In Q2 2024: 50
Shares Short % Of Outstanding: 2.11%
Texas Instruments Incorporated (NASDAQ:TXN) is a specialty semiconductor firm that makes and sells chips such as power management and signal processing products. This exposes the firm to consumer-driven markets such as smartphones, and as of H1 2024, 77% of the firm’s $7.48 billion in revenue came through analog chips. These are responsible primarily for converting real-world data such as temperature into digital signals. They are also used to manage power, which means that Texas Instruments Incorporated (NASDAQ:TXN) also enjoys exposure to battery energy storage systems. Combining these two makes it unsurprising that the stock has gained just 14.6% year to date in today’s AI-driven stock market. Subsequently, Texas Instruments Incorporated (NASDAQ:TXN)’s fate depends on recovery in smartphones, energy storage, and other industries to help it even though its products are also used in data centers.
The London Company mentioned Texas Instruments Incorporated (NASDAQ:TXN) in its Q2 2024 investor letter. Here is what the fund said:
“Texas Instruments Incorporated (NASDAQ:TXN) – TXN rallied in 2Q despite declining revenue in its latest update. TXN is beginning to see some encouraging signs of destocking nearing an end and some sub segments of the market are experiencing improving demand. TXN continued to spend on capex and should begin to see positive benefits to cash flow next year from the CHIPS Act.”
