Semiconductor Slowdown Scare Could Be Shortsighted
The long-term demand bolstered by secular shifts in technology is keeping many on board the ship for semiconductors in the long term.
By KEVIN CURRAN Jan 17, 2019 | 12:24 PM EST
Taiwan Semiconductor's (TSM) poor forecast to kick of 2019 threatened to sink semiconductor stocks lower on Thursday, but analysts and investors are still standing by their long term value.
Shares of semiconductor stalwarts like Nvidia (NVDA), Qualcomm (QCOM) Advanced Micro Devices (AMD) and ST Microelectronics NV (STM) all fell in morning trading after the issues highlighted in the near term by TSM.
Nonetheless, the long-term demand bolstered by secular shifts in technology is keeping many aboard the ship for semiconductors in the long term.
"We are now in the midst of a fourth revolution, which builds on those that came before, and has been spurred on by an exponentially paced sequence of technological breakthroughs," Wilmington Trust CIO Tony Roth said. "This horizontal digitization-that is, the arrival of digital and data at the core of nearly every economic sector and enterprise-has transformed the entire industrial complex."
Speaking to Real Money after a video interview, he highlighted that semiconductors will form the foundation of this secular shift.
He cited the shifts to cloud computing, 5G, big data, artificial intelligence, and the Internet of Things IoT as theses all pointing to the digitization that will sustain tech demand moving forward.
For a point of reference, private tech investments by non-tech Fortune 500 companies increased 149% between 2013 and 2016.
Notably, semiconductor spend has nearly doubled in the automotive industry from 2014 to 2019. If self-driving cars are to hit the road anytime soon, that should only serve to accelerate.
As such, the slower near-term forecast in such a tech-connected sector amid slowing smartphone sales is shortsighted in Roth's view.
Timing the Trimmed Forecast
Analysts added to this thesis and predicted how long the pullback in demand could persist.
"We expect a weak start but see potential from later in the first half of 2019 for cyclical semis in memory, equipment and small caps as guidance resets further and business bottoms", Credit Suisse analyst Robin Abrams wrote in her take on the Asian semiconductor market in 2019.
She added that he sees sentiment improving late in the first half of 2019 "from restocking demand in graphics as 7nm cards launch, mobile/IoT as 5G approaches and hyperscale rebounds as final assembly relocates from China."
Additionally, as Apple (AAPL) pivots toward its wearables and healthcare push and sets a new industry standard, semiconductors will still play a role. The remaining role stands to diminish the impact of lower phone demand.
Indicative of the cash still available, Apple inked an agreement with Dialog (DLGNF) Semiconductor worth $600 million to produce high power chips to keep the Apple Watch ticking. It will simply take time for this to grow anywhere near the level of the well-established smartphone segment.
Of course, much of the outlook is impacted by the trade war that remains a persistent headline risk to investors and suppliers alike. Names like Skyworks (SWKS) , Micron Technology (MU) , and NXP Semiconductors (NXPI) all come to mind as stocks with significant Chinese exposure.
The risk also effects TSMC given it supplies to both Huawei and Apple, making it eat both ends of the trade spat sandwich.
But that too could be a short-term speed bump in the overall industry's acceleration. The short term barrier could obscure the long term view of 5G, which is touted as the next generation of cell phone network that will necessitate high powered chips. That could be a more compelling catalyst in the longer term.
"We believe 5G and AI will be the megatrend underlying the ubiquitous computing which will drive the semiconductor growth in the future", Taiwan Semiconductor CEO C.C. Wei told analysts on Thursday morning. "We still say the high-end smartphone will grow is because of 5G and AI's application."
As such, the shift could signal a strong rebound from the stock slide that has left the sector bereft of hundreds of millions of dollars as investors pull out of the semiconductor sector due to its perceived "dead money" status over the coming quarters.
Stock Picking in Semis
While Action Alerts Plus portfolio and founder of TheStreet Jim Cramer has indeed touted 5G as a secular trend to watch and is bullish on the fourth industrial revolution, he is less enthusiastic on Stock of the DayTaiwan Semiconductors as the right play.
"Xilinx (XLNX) is the 5G play, that's why you don't need Taiwan Semiconductor" he said, explaining his pick for the specific shift.
He has also called out non-cyclical semis like Broadcom (AVGO) and Qualcomm (QCOM) as key names at the forefront of the 5G future.
Real Money contributor Stephen "Sarge" Guilfoyle took it a step further, telling investors not to buy TSMC even if they remain bullish on the aforementioned trends.
"Don't buy it at all", he said. "If you think Apple rebounds, buy AAPL. If you think the bottom is in the the semis, buy Intel (INTC) ."
As much of the sector bounces modestly from the morning lows, leaving TSMC's flat day in the dust, his take could be sage advice.
"Why complicate things?" Guilfoyle asked.