What happened
Shares of semiconductor favorites Advanced Micro Devices (AMD 2.44%), Applied Materials (AMAT 2.00%), and Micron Technology (MU 3.06%) plunged Tuesday following the August consumer price index (CPI) release, down 7.6%, 5%, and 6%, respectively, as of 1:11 p.m. ET.
The synchronous decline wasn't hard to figure out -- this morning's CPI report came in higher than expected. Since so much this year has been about inflation, and the Federal Reserve's response to that inflation, it's no surprise to see these tech stocks down big today.
So what
The semiconductor sector isn't as expensive as other corners of technology sector, such as software or electric vehicles, but it was still heavily affected by today's news. Rising inflation and interest rates tend to hurt the value of growth stocks especially, which is perhaps why AMD, which trades at 34 times earnings, the most expensive of these three, is down the most.
However, wouldn't a hotter-than-expected economy be relatively benign for Applied Materials, which trades at just 12.5 times earnings, and Micron, which trades at just six times earnings?
Unfortunately, the hotter inflation print this morning also increases the risk the Federal Reserve will have to raise interest rates more aggressively, which increases the likelihood of putting the economy into a recession. Applied Materials and Micron each have cyclical elements to them -- especially Micron, which produces commodity-like memory chips whose price fluctuates with supply and demand.
In fact, some parts of the semiconductor space already appear to be in a recession -- especially consumer devices such as personal computers and smartphones. With higher prices for necessities like food, electricity, and shelter, that leaves less money left over for discretionary purchases. Since many consumers invested in new PCs, phones, and televisions during the pandemic in 2020 and 2021, there is a big hangover in demand right now for those types of chips.
Of note, phones and PCs currently make up about half of Micron's business, and PC and gaming chips combine to make up more than half of AMD's business. As the largest semiconductor equipment company, Applied Materials also has broad exposure to the industry.
This morning's inflation print isn't likely to bring that consumer electronics spending back. While gasoline prices did fall 10.6% month over month, the price of other necessities rose. Electricity was up 1.5% month over month (15.8% year over year), utility gas was up 3.5% month over month (33% year over year), food prices were up 0.8% month over month (11.4% year over year), and shelter costs were up 0.7% month over month (6.2% year over year).
With the consumer getting squeezed on necessities, and likely with a phone or laptop that is less than three years old, it may be a while before the demand for consumer electronics returns.
SMH Year to Date Total Returns (Daily) data by YCharts
Now what
Semiconductor downturns can be harrowing, and the sector has already experienced a big one this year, with the VanEck Semiconductor ETF down about 30% on the year. These three stocks have, unfortunately, fared worse, with each down between 37% and 42% in 2022.
While today is a bad day and 2022 has been a bad year, I can't help but think these prices present a great opportunity for long-term investors. The long-term trends in big data, artificial intelligence, industrial automation, and more autonomous electric vehicles all point to increasing need for semiconductors over the course of this decade. While the consumer side of the semiconductor industry is definitely in recession, that will eventually stabilize. Moreover, consumer-related chips should eventually become a smaller part of the chip industry over time, as these other higher-growth enterprise and industrial use cases gain share.
While semiconductors have a cyclical element, they are also growth cyclical stocks, with higher highs and lows over time. Given the very low price-to-earnings ratios today, it may be a good idea to be a bit greedy while others are fearful.
