Chip Stocks Face Major ‘Downturn Risk’: Deutsche Bank

Shares of semiconductor companies fell on Thursday following a downbeat report from analysts at Deutsche Bank who cut their 2019 earnings estimates by 5% on average for eight chip stocks, as outlined by CNBC. 

The Philadelphia Semiconductor Index (SOX) fell 1.8% on Thursday amid a broader sell-off for U.S. equities, with the S&P 500 closing down 0.8%. Moving forward, Deutsche Bank expects tougher times ahead for chip investors, forecasting an accelerated decline in business activity. 

(For more, see also: Goldman Warns on ‘Weak Fundamentals’ for Micron, Memory Chip Stocks.)

Cyclical Fears, ‘Slowing Data Points’ to Lead to Correction 

“Over the past few months, cyclical fears have risen across the semiconductor sector as macro uncertainties (tariffs, falling PMIs, etc.) have combined with a growing list of ‘slowing’ data points across the supply chain,” wrote Deutsche Bank analyst Ross Seymore. “Our net conclusions are that current consensus imply a ‘smooth landing’ that is rare in the semi sector and therefore risks of incremental cuts to revenue/ EPS estimates is rising.” 

Seymore compared the current chip market decline to the environment in 2015, in which the down cycle lasted three quarters and led to a 25% drop on average for semiconductor shares.  

“While each cycle is different, we view this particular downturn to be the appropriate base on which to make inferences, and adjust our estimates accordingly,” stated the Deutsche Bank analyst. Seymore cut his price target for shares of semiconductor manufacturers including Analog Devices Inc. (ADI), Maxim Integrated Products Inc. (MXIM) and Texas Instruments Inc. (TXN). 

Deutsche Bank isn’t the only investment firm becoming more bearish on the chip sector. Analysts at Morgan Stanley recent lowered estimates for the once red-hot sector for Q4 and through next year. Morgan Stanley’s Craig Hettenbach lowered his price forecasts for companies including Qorvo Inc. (QRVO), Microchip Technology Inc. (MCHP) and TE Connectivity Ltd. (TEL), citing the start of an inventory correction.

(See also: Chip Stocks Face Tougher Quarter and Year: Morgan Stanley.)

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