The Philadelphia Semiconductor Index is up nearly 44% so far this year. However, the rush for AI stocks has masked cracks in the semiconductor market, and beyond enthusiasm for companies like Nvidia (NVDA), Advanced Micro Devices (AMD) and others, investor sentiment is actually mixed. Recent earnings reports have shown declines in the industrial and networking chip markets, while some companies are bracing for the impact of a potential economic slowdown on automotive chips. On the other hand, Samsung Electronics and Intel (INTC) said the smartphone and PC markets are expected to recover.
"It's important to avoid general descriptions of the semiconductor market as a whole," said Brent Fredberg, portfolio manager at Brandes Investment Partners. "The concern is that the industry may now be entering a period of digesting excess inventory."
Most of the gains in the Philadelphia Semiconductor Index in 2023 will come from Nvidia, AMD and Broadcom
Broadcom (AVGO.US) will announce its latest results after the U.S. stock market closes on Thursday. The stock has gained 62% this year, and the upcoming results will give investors a sense of the forces driving the industry's outlook. While the company makes networking chips and some custom chips that have played a role in a massive surge in investment in artificial intelligence infrastructure, the company also has a wide range of products in cars, industrial equipment, data centers and smartphones.
Fluctuating between boom and bust is nothing new for the semiconductor industry. Chipmakers have been unable to match long-term planned introductions of new supply with short-term demand fluctuations, often creating a vicious cycle.
"As inventories are digested, the automotive and industrial end markets remain in a cyclical adjustment, and we expect inventories to fall back over the next four months," Angelo Zino, vice president and senior equity analyst at CFRA Research, wrote in a report. "While the smartphone and PC markets appear to be stabilizing, it remains to be seen whether this momentum can continue into 2024."
Many industry executives believe that broad demand for semiconductors covering so many products provides some protection from downturns, but it also leaves a more diverse market with varying performance, making it harder to invest at the right time in the cycle.
Texas Instruments (TXN.US), a laggard in the Philadelphia Semiconductor Index, has fallen 5.6% this year. The company has one of the broadest customer and product ranges in the chip industry. The company said its key industrial business weakened in the third quarter, contracting 5%, while revenue related to communications components fell more than 10%.
Meanwhile, the rapid growth in demand for automotive chips may be overdone. NewStreetResearch analyst Pierre Ferragou said that third-quarter automotive semiconductor revenue exceeded expectations for the 14th consecutive quarter. He noted that the number of chips per vehicle continues to increase but is "starting to normalize." He added that automakers are no longer adding inventory and auto dealers are stocking up at record levels, suggesting a possible correction in the market.
Still, some companies appear to be over the worst. Micron Technology (MU.US), the largest U.S. memory chip maker, raised its revenue forecast for the first quarter of next year late last month, citing an improvement in the price environment as the decline in demand for personal computers and smartphones eased.
Thomas Martin, senior portfolio manager at Global Investments, said systems built around Nvidia chips will require memory and many other chips to support them, but that doesn't make them immune to a potential economic downturn.