Semiconductors Down On Analyst Revisions, Huawei Woes | ETF Trends

Semiconductor ETFs were hit on Wednesday after slumps in related semiconductor stocks including LAM research, Applied Materials, Micron, Teradyne, and Qualcomm. In May, the sector was down more than 15%, its worst monthly performance since 2008.

The VanEck Vectors Semiconductor ETF (SMH) was down 1.98%, the SPDR S&P Semiconductor ETF (XSD) down 1.79% and Invesco Dynamic Semiconductors ETF (PSI) was down 2.06% as of 1:40 pm ET on Wednesday.

Some analysts, including those at Evercore now expect another leg down in the memory chip market during the fourth quarter of 2019 and now anticipate that the industry’s recovery pushed to the second half of next year.

The analysts said the reason for their negative view is they see ongoing surplus inventories in both DRAM and NAND memory. NAND storage is a primary storage, which is commonly used in such things as cell phones and USB flash drives. DRAM memory is different in that it used to allow computers, phones and tablets to run multiple applications at the same time, but it is not primary storage.

Evercore said they see the most near-term downside risk for Western Digital, Micron and Lam Research, the stocks which are leading the Vaneck Semiconductors Index drop. All of those stocks were trading down more than 4% in morning trading. The analysts said they prefer ASML and Applied Materials.

The Evercore analysts sliced price targets for Applied Materials and Teradyne. They are maintaining Applied Materials’ rating at outperform, but the price target was lowered to $50 from $55. KLA Tencor is also rated in line, but the price target was pared to $120 from $130. Meanwhile, Evercore’s price target for Teradyne went from $47 to $43. Meanwhile, Lam Research was downgraded to inline, and the analysts slashed its price target to $195 from $225.

“While we reduced our estimates 2 weeks ago for [Micron], worse trends since then causes one more cut— we are better buyers in high $20’s. For [Western Digital], we maintain Underperform rating and $30 PT. We see ongoing excess inventories weighing on NAND pricing through CY19,” they wrote.

In addition to revised equity projections, also affecting chip stocks is continuing risk from Huawei, which the U.S. government is banning from using U.S. suppliers.

“We’re still pretty cautious. [Tech] had a rebound, but if you look beyond [those]five days, it’s a pretty big underperformer,” said Dan Suzuki, portfolio manager with Richard Bernstein Advisors. “A part of this is a reversal based on sentiment.”

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