What happened
Semiconductor stocks started off the week on a strong note Monday, with Intel (INTC 4.09%) gaining 2.3%, Nvidia (NVDA +0.19%) up 6.3%, and Advanced Micro Devices (AMD 1.31%) advancing most of all, up 6.9%, as of 10:25 a.m. ET.
But buying into this rally is not without risk.
NASDAQ: AMD
Key Data Points
So what
Certain semiconductor stocks do look attractive at their present prices. Intel stock, for example, costs less than 9 times trailing earnings currently. AMD and Nvidia, at 39 times and 60 times trailing earnings, respectively, may not be objectively cheap, but they are at least about 50% cheap-er than what they were selling for a year ago.
Investors in developed-world semiconductor giants may also still be encouraged by last week's news that China, which had been expected to throw as much as $143 billion in subsidies at its semiconductor sector, may not actually be able to afford that investment and is rethinking it. The absence of Chinese government support for competing wares can be interpreted as good news for Western semiconductor companies that may benefit from competing subsidies from the U.S. government, announced last year.
And yet, the news is not all good for semiconductor investors.
On Friday, South Korean tech giant Samsung warned that it's expecting to report a 69% decline in profits for its December quarter. Samsung attributed the decline primarily to weak semiconductor demand, which makes up 30% of the company's business. DRAM and NAND flash memory prices are declining alongside the slack demand. At the same time, "chip inventories are piling up across the supply chain," warns Nikkei Asia.
Now what
And that's not even the worse news.
In the face of weak demand and weaker prices, many semiconductor companies have announced plans to rein in their capital investments and at least stop adding more fuel (i.e., more supply) to the fire. Samsung, however, is continuing to invest, continuing to buy new semiconductor manufacturing equipment, and continuing to churn out chips. So even if China ultimately decides not to exacerbate a situation of global semiconductor oversupply, right next door in South Korea, they've decided to do the opposite.
Best-case scenario, I think this could extend the duration of the growing semiconductor glut, depressing prices and profit margins for companies like Intel, AMD, and Nvidia throughout 2023. Worst-case, it could make things worse by driving prices down even further.
If you ask me, that's not a great reason for investors to be going all in on semiconductor stocks today.
