From Minimalism To Tech

Semiconductor Pounding Sand

Posted in Money on May 3rd, 2017

In the last nine years, the semiconductor industry has been rising at a steady rate. With earnings season, we are starting to see signs of weakness in this industry. In turn, stock prices are reacting to negative and lackluster earnings by gapping down after hours. Will these stocks be able to recover? We are remaining cautious in this industry. There are major pitfalls to watch out for, but this may be just a small pullback before continuation of the trend.

Nice Long Trend

For value investors, years 2008 and 2009 have been great opportunities to invest in many beaten down industries. Semiconductor is one of those industries. It hasn’t really recovered from the year 2000 technology bubble burst, and was further beaten down by the US mortgage/financial crisis. However, the semiconductor index $SOX shows the relative bottom was marked in November 2008.

Recent Shocks

It may be easy to report when a company reports bad earnings. However, sometimes the earnings are in line with analysts’ estimates and stock prices react lower. We have our own theories why this happens, but feel free to comment and speculate below in the comments section.

Recent earnings seem to indicate that growth is harder to come by:

  • Advanced Micro Devices ($AMD) announced earnings on Monday, coming in line with estimates. However, this disappointed investors and the stock price took a large hit after hours, more than 10% drop from mid $13. It has dropped even further during the trading hours on Tuesday. $AMD was considered one of the best performers of 2016 and many have made plenty of money on this stock. We will have to see if $AMD can flatten and bounce from this drastic drop.
  • Cypress Semiconductor ($CY) announced earnings yesterday, beating analysts’ estimates. However, the stock dropped by more than 3% after hours. Usually, we will think that when a company beats expectations, the investors will react positively after hours.
  • Maxim Semiconductor ($MXIM) also reported earnings beat on April 20. However, initial reaction was negative. It has recovered in stock price after about a week.
  • Texas Instruments ($TXN) also beat estimates with their Q1 earnings. However, stock has moved downward after the announcement.
  • Qualcomm ($QCOM) has been issuing warnings due to royalty payment feud with Apple ($AAPL). Also, $QCOM stock has dropped back in January. Also, $QCOM is trying to buy NXP Semiconductor ($NXPI) for $47 billion dollars. It is debatable whether mergers help companies to grow while adding on more debt.
  • Apple announced in early April that they are developing their own graphics chip. This shocked the supplier, Imagination Technologies ($IGNMF). The timeline is two years away to stop licensing their intellectual property. But, the stock reaction was immediate and tanked the stock by more 50%. It is an interesting trend, where technology companies are finding new avenues for cost reduction by developing intellectual property in-house.

Not All Negative

Although we are skeptical in nature, we try to provide some perspective, even countering our skepticism. We want to indicate some warning signs. There are many semiconductor companies that are posting positive earnings and their stock price is reacting accordingly. From a trendfollowing perspective, the Semi Index (^SOX) seems to be pulling back, but is still above the 50-day simple moving average. And it is way above the 200-day simple moving average. If a position was taken, the trendfollower will continue to hold the position until the trend is broken or a profit stop has been hit.

The first half of the year tend to be a slow season for technology companies. In turn, the semiconductors supplying to these companies will have to work harder to grow and maintain quarter to quarter earnings. As a cyclical market, we will have to keep an eye on future events to see if this is a trend, or part of the normal cycle. Good luck and stay cautious. “May the earnings ever be in your favor!”

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