What happened
Shares of semiconductor stocks Taiwan Semiconductor Manufacturing (TSM +1.40%), Nvidia (NVDA +2.59%), and Skyworks Solutions (SWKS 0.35%) were rising on Tuesday, up as much as 3.4%, 4.6%, and 2.2%, before settling into gains of 2.7%, 4%, and 0.6%, respectively, as of 1:42 p.m. ET.
The sector-wide optimism was helped along by a positive note from Bank of America semiconductor analyst Vivek Arya this morning, along with continued optimism over moderating inflation and the broader economy.
NASDAQ: NVDA
Key Data Points
So what
In a note this morning, Arya wrote that he sees the potential for a "soft landing" in the semiconductor space. As interest rates have risen sharply over the past year, recession fears loom, and consumer electronics sales have plummeted at an historic rate, many fear a large decline in semiconductor sales in 2023.
However, other parts of the semiconductor market outside of consumer electronics are looking rather strong, especially artificial intelligence applications and automotive chips, which remain in high demand. Arya wrote, "We assume a soft-landing (nonmemory semi sales down [less than 5% year over year], also confirmed by recent Taiwan Semiconductor (TSM) results/outlook) as consumer chip inventory correction is completed by [the first half] and as industrial/auto chip pricing remains resilient."
Last week, Taiwan Semi held its fourth-quarter earnings release and conference call, during which it forecast the current inventory correction would last through the first part of 2023, but which should be followed by a much stronger second half. Notably, TSMC guided for slight growth for itself in 2023, which is quite a feat amid the soft semi market after two historically strong "boom" years.
Arya also had positive things to say about Nvidia, given its new Hopper GPUs and other products coming to market, just as breakthrough-generative AI applications are taking off. I'm sure most readers have now heard of the capabilities of ChatGPT from OpenAI, which has caused quite a stir in the tech world since its release in late November.
Arya believes the ongoing strength of cloud-based AI applications should help Nvidia, which is a leader in GPUs that power most AI applications. While AI chip sales should help put a floor under Nvidia's results, if there is a recovery in gaming from the down year of 2022, Nvidia has a chance to bounce back nicely from its 50.3% decline last year.
Skyworks wasn't mentioned specifically by Arya's note but nonetheless benefited from the positive sentiment on the sector. Although Skyworks is still heavily exposed to mobile handsets, specifically the iPhone, it has made an effort in recent years to diversify its business into the attractive auto, industrial, and data center markets, especially after 2021's acquisition of Silicon Laboratories. Therefore, that part of Skyworks' business should continue to be resilient if Arya's take turns out to be correct.
Now what
The current fourth-quarter 2022 and first-quarter 2023 earnings results from semiconductor companies could see some rough numbers, as these companies see reduced demand and difficult comparisons from the first half of last year.
However, the semiconductor sector sold off violently in 2022, and investors in the space tend to look through current numbers toward what may be coming down the line six to 12 months out. That makes timing a bottom in the cyclical semiconductor space very tricky.
Yet remember that the chip sector isn't purely cyclical, but rather a growth-cyclical market that should grow at a higher rate than GDP over time. While the semiconductor cycles can be unpleasant to endure, the long-term growth trend is definitely intact, as seen in Arya's note.
That means if you are interested in a chip stock and it trades at a reasonable valuation based on its through-cycle earnings, I wouldn't hesitate to buy, even amid ugly-looking earnings results. The stock price could very well appreciate before earnings inflect higher.
