Shares of semiconductor stocks Texas Instruments (TXN -0.55%), Micron Technology (MU -3.13%), and Navitas Semiconductor Corporation (NVTS -0.65%) fell more than the market in Wednesday trading, finishing down 3.6%, 3.5%, and 10.8%, respectively.
While none of these three companies had significant news items today, earnings from large-cap semiconductor peer Analog Devices (ADI -0.67%) provided a hint of caution. Given that Analog is considered perhaps the most defensive of semiconductor stocks, even a small bit of softening in its outlook was enough to send the whole sector down after its recent one-month rally.
At first glance, one might wonder what, exactly, the problem is. After all, Analog Devices reported strong 77% revenue growth and adjusted (non-GAAP) EPS growth of 47% to $2.52, with both figures beating expectations. Not only that, but the company also guided for sequential growth that was also above analysts' expectations.
However, it appears nervous investors latched onto this phrase in the earnings release: "While economic uncertainty is beginning to impact bookings, demand continues to outpace supply, resulting in higher backlog, paving the way for a strong finish to a banner year."
Why was that phrase "beginning to impact bookings" enough to send the entire sector into a tailspin? It's likely because ADI's product portfolio was seen as ideally positioned for this environment. While the current semiconductor downturn has been in the news for a while, it has largely been centered around smartphones and PCs.
ADI's portfolio, however, had remained strong even through the broader downturn. In the quarter, ADI received 71% of revenue from auto and industrial end-markets, which had seen shortages this year and had displayed resilient growth even as consumer chips declined. However, that sentence in the earnings release led some to think things could change later this year.
ADI is a close competitor of Texas Instruments, which has a similar product portfolio and end-markets, so it's no wonder Texas Instruments was moving in tandem with ADI. Of note, Texas Instruments reported strong growth last quarter and a strong outlook, but its quarter ended in June, while ADI's ended July 30. Therefore, there may have been some softening as recently as late July.
That seems to be what Micron revealed last week, when it again lowered its quarterly guidance at an industry conference only one month after giving disappointing guidance at the end of June. On a similar note to ADI, Micron said it was also seeing some inventory adjustments broaden from the weak PC and phone markets even to the previously strong data center, auto, and industrial markets. Micron's commodity-like memory products can see their prices swing wildly, so it's no surprise that its stock was also highly sensitive to ADI's commentary.
The same goes for Navitas, which is a small-cap stock in the space that is growing fast but still generating hefty losses. Money-losing growth companies like Navitas are particularly volatile these days, given the uncertainty around inflation and interest rates.
Additionally, Navitas is exclusively pursuing gallium nitride and silicon carbide chips, which are next-generation technologies for power semiconductors. Power semiconductors are set to play a key role in electric vehicles and charging stations, so if ADI's caution around auto chip growth holds water, that could also mean a weakening for Navitas' key growth markets. No wonder it was down so much today.
The semiconductor sector is often seen as a proxy for overall economic growth, so these stocks will tend to be more sensitive to economic data points, both to the upside and the downside.
While it is increasingly clear we are entering some sort of semiconductor downturn, it is also highly unclear how severe that downturn will be. Is this just a pandemic "hangover," from when people loaded up on all the electronic devices they needed, or is it the beginning of a broader global recession?
ADI was quick to note that the slowdown in bookings was only "moderate," with "modest" cancellations, and that demand still exceeded supply going into next year.
Meanwhile, semiconductor stocks have remained resilient over the past month and a half in spite of these warnings from Micron and others, perhaps an indication that the stocks have fallen so much as to reflect a recession already.
If the economy tips into a bad recession, these stocks could retest their June lows; however, if we only have a "moderate" slowdown as ADI management indicated, these stocks could recover quickly. Those interested in the semiconductor sector should keep their ears out for more data points as we get through the summer -- or just decide to hold through this cycle, no matter what comes in the near term.