Can Semiconductor Industry Sustain Momentum In 2019?

The semiconductor industry had a rough 2018, with most of the major chipset manufacturing stocks closing in the red in last year. The Philadelphia Semiconductor Index (SOX) was down 2.6%. The disappointing performance can be attributed to prolonged trade conflict, chipset supply glut, fear of global demand slowdown and crash of cryptocurrency.

However, the semiconductor industry has rebounded in 2019. The Philadelphia Semiconductor Index (SOX) is up 14.5% year to date compared with 8.2% growth of the benchmark S&P 500 index. Meanwhile, the tech-heavy Nasdaq Composite index has witnessed an increase of little over 10%.

Most of the semiconductor manufacturers have reported strong earnings result so far. Intel Corp. (NASDAQ:INTC) , Texas Instruments Inc. (NASDAQ:TXN) , Taiwan Semiconductor Manufacturing Co. (NYSE:TSM) , Lam Research Corp. (NASDAQ:LRCX) and Xilinx Inc. (NASDAQ:XLNX) reported solid fourth quarter earnings results.

A Disappointing 2018 for Semiconductor Industry

Chipset industry’s downturn in 2018 was the effect of several negative factors. Firstly, the trade-related conflict between the United States and China, which commenced in March 2018 aggravated through the year. China is a major supplier of intermediary products for chipset manufacturing in the United States.

Secondly, fear of global economic slowdown, especially the downturn of the Chinese economy, was a major concern. The IMF has reduced global economic growth forecast for 2019 due to trade war concerns. Notably, China also serves as the largest market for several large U.S. semiconductor makers.

Thirdly, crash of cryptocurrency industry in 2018 took a heavy toll on the semiconductor industry. Several chipset manufacturers, especially those which manufacture flash memory were optimistic about the growth potential of cryptocurrency. Consequently, chipset supply glut occurred which resulting in price reduction.

Semiconductor Industry Rebounds in 2019

The semiconductor industry has recovered so far this year buoyed by several positive developments.

Firstly, most of the major chipset developers reported solid fourth quarter earnings. For these companies, the earnings beat was mainly because the high-margin analog business remained strong and 5G businesses. Industrial sector and auto were also good. Revenues were strong attributed to 5G deployment by the telecom operators in North America, China and South Korea.

Moreover, Texas Instruments’ transition from 200mm to 300mm and Xilinx’s strong performance of FPGA-as-a-Service (FaaS) model for data centers also helped them to post strong results. Likewise Lam Research continued DRAM shifting to lower nodes, NAND shifting to 96-layer devices, which helped the company to lower cost. Skyworks (NASDAQ:SWKS) is benefiting from strong demand of its wireless communications engines. The company’s expanding product portfolio, growing clout in the Internet-of-Things (IoT) solutions and 5G markets are key catalysts.

Secondly, on Feb 6, the Semiconductor Industry Association announced that in 2018, more than a trillion chips shipped globally, for the first time in industry’s history. Sales of chips grew 13.7% to $468.8 billion worldwide in 2018 year over year. Consequently, the SOX was up 2.6%.

Thirdly, several positive developments took place on trade war front. Notably, the two countries are currently observing a trade truce which will come to end on Mar 1.Treasury Secretary Steven Mnuchin said on Feb 6, that a high level U.S. delegation will visit China to resolve the trade related issues.

Price performance of major chipset makers year to date.

Xilinx carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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