Semis are Facing the Worst Downturn in a Decade, Chip Stocks Have Further 25% to Fall - Citi

© Reuters. Semis are Facing the Worst Downturn in a Decade, Chip Stocks Have Further 25% to Fall - Citi

By Senad Karaahmetovic

Citi analyst Christopher Danely has warned that chip stocks are yet to hit THE bottom within this correction cycle amid the high recession risks and inventory build.

The analyst has reiterated his belief that “every company/end market will correct.”

“Consensus estimates declined during earnings season for the first time since the pandemic driven by the PC and handset slowdown amidst the recession. We also witnessed the first signs of a correction in the automotive and industrial end markets and we continue to believe we are entering the worst semiconductor downturn in a decade given the recession and inventory build,” Danely wrote in a client note today.

Citi analysts see SOX (PHLX Semiconductor Sector), the benchmark U.S. index for chip stocks, falling another 25% and ultimately printing new lows. About 15% should be driven by multiple corrections, in addition to 10% by earnings estimates cuts.

SOX fell over 40% from the first week of January to July before rebounding 30% from 20-month lows.

However, the index has turned south again after accumulating over 9% of losses over the past two weeks.

Danely notes that consensus estimates decline 4% during earnings season, which also fueled the most recent selloff in chip stocks.

“We expect Consensus estimates to decline by at least 10% over the next few quarters, similar to 2011/2012 downturn, driven by demand contraction and inventory correction,” the analyst warned.

As far as the individual stocks are concerned, Analog Devices (NASDAQ:ADI) is reiterated as Top Pick in this sector and “favorite” stock to own, followed by Micron (NASDAQ:MU), AMD (NASDAQ:AMD), ON Semiconductor (NASDAQ:ON), and GlobalFoundries (NASDAQ:GFS).

UBS analyst Nicolas Gaudois also weighed in on the recent price action in chip stocks.

“We may be more than half-way before those earnings cuts stop to matter altogether for the semis stocks. With 1/ lead indicators troughing by 4Q22- 2Q23; 2/ investors underweight some of the universe (Asia, Memory mostly) - we would not want to overstay a more bearish positioning. We would recommend investors to soon start sizing up select semis stocks with favourable risk/reward,” Gaudois wrote in his note to UBS’ clients.