By Sam Boughedda
A Citi analyst said in a note to investors Thursday that the firm remains negative on semiconductors but believes a short-term rally could continue through August.
The analyst explained that the potential rally is due to the near-term downside already being understood and investors being universally bearish on semiconductors.
As a result, Citi has opened positive catalyst watches on NXP Semiconductors (NASDAQ:NXPI) and ON Semiconductor (NASDAQ:ON) "in anticipation of good earnings and a short-term bounce in the group."
"Investors remain almost universally bearish on semis...almost every investor we met with was bearish on semiconductor fundamentals and believes a correction is coming to just about every company in the group," said the analyst. "A few investors remain hopeful that auto or data center-related semis will make it through the downturn unscathed....but some acknowledge a short-term rally could continue – we agree."
According to the analyst, while the vast majority of investors remain bearish on semis, roughly 20% believe the rally could extend into August.
"We noticed a fair amount of bearishness on ON from investors given the inventory build in autos and margin headwinds from the fab acquisition although we don’t expect either to slow estimates in the near term," he said.
He added: "Investors were most positive on NXPI given high automotive exposure with some potential of a buyout. We believe investors remain relatively positive on capital equipment stocks post recent capex cuts as buy-side WFE expectations drop to $85B (Citi $80B)."