What happened
Shares of chipmakers Qualcomm (QCOM 2.11%), Advanced Micro Devices (AMD +0.19%), and Micron Technology (MU +3.41%) all rose sharpy on Tuesday, with the stocks moving as high as 5.3%, 4.8%, and 5.6%, respectively at their daily highs. As of 2:45 ET, all were only slightly below those levels.
The technology sector is bouncing back broadly from a recent decline, based on the dual fears of the omicron variant and higher interest rates. However, those concerns seem to be ebbing today. In addition, Micron in particular was called a "top pick" by a prominent semiconductor analyst.
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So what
Lately, the technology sector has been hammered. In spite of the emergence of the omicron coronavirus variant, Federal Reserve officials still sounded a hawkish tone at recent Congressional hearings. If tightening financial conditions prove to be premature, it could slow growth or even cause a recession. The last time the Federal Reserve made such a mistake was in 2018, when it raised interest rates just as the U.S.-China trade war was kicking into gear. The result was a pretty big decline in semiconductor demand in late 2018 and early 2019.
However, over the weekend, Dr. Anthony Fauci said early data indicated that omicron may cause less severe disease -- with the caveat that more data was needed to confirm that fact. And on Tuesday, more good news came when drugmaker GlaxoSmithKline said that its COVID-19 antibody treatment seemed to be effective against omicron in early tests.
Although they have a long-term growth quality to them, semiconductors are also somewhat cyclical, so lower omicron concerns may lead to expectations of stronger economic growth, which is good for semiconductor stocks.
In addition, Micron was named one of Citigroup's "top picks" in the semiconductor space for 2022. Micron had sold off over the summer, as investors grew wary of potential softening of PC memory demand amid shortages of other chips. In addition, some had feared companies had double-ordered and built inventory in the strong first half.
However, Citigroup's Christopher Danely said inventories may stay high, as semiconductor companies have moved toward long-term agreements, and most are solidly booked through 2022. Micron had also said on its September conference call that its customers may choose to hold higher levels of inventory than they did before the pandemic, as the costs of higher inventory are less than those of lost sales experienced amid shortages this year.
Additionally, DRAM demand in particular, which is where Micron gets most of its revenue, was just revised upward by research firm Trendforce, as notebook demand has come in better than feared. Micron is perhaps the most sensitive to booms and busts, so continued strength in demand next year would make it one of the bigger winners in the space.
Now what
Semiconductors are a highly attractive sector, since they are levered to big technology trends, but generally trade at much better valuations than their high-multiple software peers. Many also pay out dividends and share repurchases, which is something one doesn't get from most software stocks. All three of the aforementioned companies repurchase their shares, and Qualcomm and Micron currently pay dividends.
So if pandemic-fueled technology growth continues and economic growth remains resilient to omicron, semi stocks like Qualcomm, Advanced Micro Devices, and Micron all look attractive heading into next year.
