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.”
7. Lam Research Corporation (NASDAQ:LRCX)
Number of Hedge Fund Holders In Q2 2024: 84
Shares Short % Of Outstanding: 2.49%
Lam Research Corporation (NASDAQ:LRCX) is one of the few companies in the world that makes and sells products that are used in several phases of semiconductor fabrication. These phases include etching, deposition, and managing intra-chip connecting circuits called interconnects. Its product portfolio also makes Lam Research Corporation (NASDAQ:LRCX) a good example of a chip stock that is struggling these days even though AI optimism still persists on Wall Street. The shares are down 2.58% year to date due to multiple factors. Firstly, during its fiscal 2024, 42% of Lam Research Corporation (NASDAQ:LRCX)’s revenue came from the memory industry. This industry has struggled in 2023 and has been on a slow recovery this year which hasn’t helped ignite investor consequences. Secondly, 42% of its revenue came from China, where not only have economic struggles hurt Lam Research Corporation’s (NASDAQ:LRCX) revenue but investors are also wary of future sanctions.
Artisan Partners mentioned Lam Research Corporation (NASDAQ:LRCX) in its Q2 2024 investor letter. Here is what the fund said:
“The top contributors to performance for the quarter were Alphabet, Lam Research Corporation (NASDAQ:LRCX) and Elevance. Lam Research shares rose 10% during the quarter and are up 67% over the past year, primarily due to optimism around the pending investment cycle in semiconductor capital expenditures. Lam is one of the largest equipment manufacturers used to make semiconductor chips. This equipment, commonly referred to as WFE (wafer fabrication equipment), is expected to experience significant growth due to a combination of a cyclical rebound in memory chips and growing demand for new AI-related chips. Lam’s product portfolio is particularly well positioned to benefit from both trends and should grow even faster than the overall market. Its shares now trade at ~30X prior peak earnings, which suggests this dynamic is well understood by the market and is mostly priced in.”
6. Intel Corporation (NASDAQ:INTC)
Number of Hedge Fund Holders In Q2 2024: 75
Shares Short % Of Outstanding: 2.75%
Intel Corporation (NASDAQ:INTC) is one of the biggest and oldest chip-manufacturing companies in the world. It is the dominant player in the global CPU market for consumer and data center use. Intel Corporation (NASDAQ:INTC) is also the largest US chip manufacturer, which has proven to be indispensable to its stability in 2024. The year has been one of the worst on record for the firm, with its shares being down 53% year to date. Intel Corporation (NASDAQ:INTC) announced a dividend suspension earlier this year and laid off thousands of employees as a slow non-AI industry spurred by inflation and interest rates came right at a time when the firm was investing in advanced chip manufacturing. Right now, Intel Corporation’s (NASDAQ:INTC) narrative depends on its ability to successfully execute its 18A chip manufacturing technology and score industry orders for its contract chip manufacturing subsidiary. Any progress on these fronts could translate to tailwinds for the stock.
ClearBridge Investments mentioned Intel Corporation (NASDAQ:INTC) in its Q3 2024 investor letter. Here is what the fund said:
“While the market environment clearly was a headwind in the third quarter, several of our large positions also faced challenging conditions, which negatively impacted results. In the information technology (IT) sector, Intel Corporation (NASDAQ:INTC) has come under additional pressure due to continued softness in the company’s core PC and server markets as well as concerns on the company’s longer-term competitive position. While Intel’s turnaround is not happening overnight, we are constructive on the outlook into 2025: the company’s product positioning should be much improved and it should be positioned to gain market share in a cyclical upswing in which it has strong earnings power. A somewhat adverse spending environment due to AI myopia has weighed on shares, but we still think the market is undershipping PCs and general servers following a COVID normalization period that saw demand get pulled ahead and then languish as companies froze IT budgets. The installed base is now getting older, and we expect a strong refresh cycle into next year. The delay is actually beneficial to Intel, whose product positioning will be all the more improved. While our investment case is not predicated on an M&A transaction, and we believe one is unlikely, the expression of interest in the company speaks to the value of the assets, which we think still trade at a meaningful discount to fair value.”
5. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Number of Hedge Fund Holders In Q2 2024: 108
Shares Short % Of Outstanding: 2.76%
Advanced Micro Devices, Inc. (NASDAQ:AMD) is a semiconductor design company. The firm designs and sells CPUs and GPUs for a variety of use cases. These include personal computers, gaming consoles, data centers, and AI use cases. This makes Advanced Micro Devices, Inc. (NASDAQ:AMD) the only firm in the world that simultaneously competes with both NVIDIA and Intel. The firm has benefited from Intel’s struggles and leverages product design along with TSMC’s manufacturing technologies to gain market share over the larger firm. Additionally, in a price-constrained environment, Advanced Micro Devices, Inc. (NASDAQ:AMD) benefits because of its affordability, and its smaller size also easily captures market share. The firm has been making aggressive investments in AI recently through multiple acquisitions that are aimed at bolstering its position in the data center industry. However, these acquisitions come at a cost and Advanced Micro Devices, Inc. (NASDAQ:AMD) has been debt-stressed until very recently so future leverage might create a headwind.
Baron Funds mentioned Advanced Micro Devices, Inc. (NASDAQ:AMD) in its Q2 2024 investor letter. Here is what the fund said:
“Advanced Micro Devices, Inc. (AMD) is a global fabless semiconductor company focusing on high performance computing technology, software, and products including CPUs, 9 GPUs, FPGAs, 10 and others. Shares of AMD remain volatile, and after a strong run earlier in the year, the stock fell during the quarter as investors continue to wrestle with AMD’s competitive positioning in the AI compute market relative to NVIDIA, who continues to strengthen its full-system solution offerings at a rapid pace. AMD also updated its MI300 GPU chip revenue expectations for the full year to “greater than $4 billion” vs. prior $3.5 billion, which disappointed the market a bit relative to high expectations. Over the long-term, we believe AMD, with its unique chiplet-based architecture and open-source software ecosystem, will play a meaningful role in the rapidly growing AI compute market, where customers don’t want to be locked into a single vendor and AMD offers a compelling total-cost-of-ownership proposition, especially in inferencing workloads. Simultaneously, we believe AMD will continue to take share from Intel within traditional data center CPUs, which, while now a slower growth market, is likely to see a near-term refresh as data centers look for ways to improve energy efficiency and optimize existing footprints.”
4. Micron Technology Inc. (NASDAQ:MU)
Number of Hedge Fund Holders In Q2 2024: 100
Shares Short % Of Outstanding: 3.08%
Micron Technology Inc. (NASDAQ:MU) is the third largest and the only pure-play memory manufacturer on our list. Its products are used alongside CPUs and GPUs for storage information immediately required for computing. High-end memory products sold under the HBM3 and HBM3e branding have become quite popular due to their use in AI products. They are responsible for most of Micron Technology Inc.’s (NASDAQ:MU) 30.94% year-to-date share price gains since the broader memory industry has struggled to recover. The scale of the memory slowdown’s impact on its business is clear. This is because Micron Technology Inc. (NASDAQ:MU) is yet to recover to its 2022 levels. During the firm’s fiscal year 2024, it earned $25.1 billion in revenue, an 18.5% drop over 2022’s $30.8 billion. 70% of the firm’s revenue comes through DRAM memory, making it important that it continues to execute with its HBM3e memory. Micron Technology Inc. (NASDAQ:MU) enjoys advantages over others because of its superior manufacturing technologies and has generated interest in its products among big-ticket AI players like NVIDIA.
ClearBridge Investments mentioned Micron Technology Inc (NASDAQ:MU) in its Q2 2024 investor letter. Here is what the firm said:
“Quarterly Performance Stock selection in the IT sector proved to be the largest contributor to performance, particularly driven by the strong performance of Micron. The company, which designs, develops, manufactures and sells memory and storage products, continued its strong performance alongside other AI beneficiaries as the anticipated demand for new and additional storage essential for housing and training large language AI models continues to grow.”
3. Microchip Technology Incorporated (NASDAQ:MCHP)
Number of Hedge Fund Holders In Q2 2024: 46
Shares Short % Of Outstanding: 4.99%
Microchip Technology Incorporated (NASDAQ:MCHP) is another signal controller and microcontroller manufacturer. This positions the firm favorably when it comes to capturing data center revenue. Yet, despite this, Microchip Technology Incorporated (NASDAQ:MCHP)’s shares are down 10.6% year to date, driven by a staggering 16.8% drop in the first week of August. Since the firm depends on automotive and industrial markets for a sizeable chunk of its revenue, Microchip Technology Incorporated (NASDAQ:MCHP)’s first fiscal quarter results released in August start saw its revenue sink by a whopping 45.8%. Not only are industrial and automotive markets struggling due to interest rates and inflationary-driven low spending, but Microchip Technology Incorporated (NASDAQ:MCHP) is also struggling due to an inventory buildup in the non-AI IT and data center market. Consequently, until the outlook improves, there are few tailwinds for the share price.
Aristotle Atlantic Partners mentioned Microchip Technology Incorporated (NASDAQ:MCHP) in its Q2 2024 investor letter. Here is what the firm said:
“Microchip develops, manufactures and sells smart, connected and secure embedded control solutions used by its customers for a wide variety of applications. With over 30 years of technology leadership, Microchip’s broad product portfolio is a Total System Solution for its customers that can provide a large portion of the silicon requirements in their applications. Total System Solution is a combination of hardware, software and services that helps customers increase their revenue, reduce their costs and manage their risks compared to other solutions. Microchip’s synergistic product portfolio empowers disruptive growth trends, including 5G, data centers, sustainability, Internet of Things and edge computing, advanced driver assist systems and autonomous driving, and electric vehicles in key end markets such as automotive, aerospace and defense, communications, consumer appliances, data centers and computing, and industrial.
We believe Microchip’s Total System Solution will continue to support industry share gains and margin expansion as end- market demand for industrial and Internet of Things compute needs begins to recover off current lows. Management has accelerated the drawdown of high customer inventory levels by shutting down manufacturing facilities, and current industry data as well as commentary from peers indicates that overall end demand is seeing early signs of improvement. The company has a demonstrated track record of margin expansion, and we expect to see gross margins trough at the current level and, through internal efficiencies and pricing initiatives for its Total System Solution, expand and drive increasing operating margins and higher levels of free cash flow.”
2. ON Semiconductor Corporation (NASDAQ:ON)
Number of Hedge Fund Holders In Q2 2024: 45
Shares Short % Of Outstanding: 5.56%
ON Semiconductor Corporation (NASDAQ:ON) is the silicon carbide manufacturer that we mentioned in the introduction to this piece. The fact that its shares are down 18.31% year to date along with its exposure to the automotive and industrial industries also makes it unsurprising that it is the second most overweight short semiconductor stock among institutional investors according to Jefferies. A lack of diversification has hit ON Semiconductor Corporation (NASDAQ:ON) hard since during H1 2024, 53% of its $3.6 billion in revenue came from automotive products. Reduced industrial activity and industrial inventory buildup also led to the firm’s H1 2024 industrial revenue dropping by 21% annually. Subsequently, two key factors are driving ON Semiconductor Corporation (NASDAQ:ON)’s hypothesis. First is naturally a recovery in its key markets, and as long as it remains muted, investors should stay on the sideline. The second is ON Semiconductor Corporation (NASDAQ:ON)’s downsizing strategy through which it aims to offload some semiconductor fabrication to contract manufacturers. While this can allow the firm to reduce operating expenses, it carries the risk of being at the mercy of industry capacity in case industrial and automotive activity sharply picks up.
Artisan Partners mentioned ON Semiconductor Corporation (NASDAQ:ON) in its Q1 2024 investor letter. Here is what the fund said:
“ON Semiconductor is a leading designer and manufacturer of chips for power management and image sensing. From a battery-electric vehicle (EV) standpoint, ON is a leading producer of silicon carbide chips. Shares have been under pressure as the company grapples with multiple quarters of inventory right-sizing across the entire auto supply chain and slower-than-expected growth of EV sales. However, ON is seeing smaller sales declines than peers due to market share gains, and we believe the company will be equally well positioned if automakers rebalance their efforts from full EVs toward hybrid vehicles. We remain patient.”
1. Wolfspeed, Inc. (NYSE:WOLF)
Number of Hedge Fund Holders In Q2 2024: 29
Shares Short % Of Outstanding: 30.74%
Wolfspeed, Inc. (NYSE:WOLF) is another ill-fated silicon carbide semiconductor manufacturer. Its woes are deeper than ON Semi though, since unlike the latter, the firm has not turned a profit in any of its four latest fiscal years. Consequently, investors just seem to be waiting to pounce on a sharp share price drop. Wolfspeed, Inc. (NYSE:WOLF)’s shares are down 64.36% year to date, which makes it one of the worst-performing semiconductor stocks on our list. Its products are used in a variety of applications, such as electric vehicles, solar systems, and radio frequency products production – all of which are dependent on a robust and cyclical economy. However, Wolfspeed, Inc. (NYSE:WOLF) is one of the few companies capable of producing 200mm silicon carbide wafers. These are large wafers that reduce the per-chip costs for buyers. Consequently, success in landing deals could help the firm, and a cool $750 million in CHIPS Act subsidies and another $750 million in capital from a consortium of investors could help the firm manage its negative cash flow problems. Yet, the CHIPS funding is contingent on milestones, so unless Wolfspeed, Inc. (NYSE:WOLF) delivers, it can struggle to generate tailwinds.
Chartwell Investment Partners mentioned Wolfspeed, Inc. (NYSE:WOLF) in its Q1 2024 investor letter. Here is what the fund said:
“Wolfspeed was under pressure, as weak sales of electric vehicles (EVs) from automakers led to lower demand levels for the company’s specialized silicon carbide (SIC) chips widely used in EVs. These lower demand trends started in the second half of last year and continued through the first quarter.”
WOLF is a semiconductor stock that institutional investors are shorting according to Jefferies. While we acknowledge the potential of WOLF as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than WOLF but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and insiders. Please subscribe to our free daily e-newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below.
