The red-hot semiconductor sector is leading the market into the red today.
Last night's disappointing earnings guidance from Texas Instruments (NYSE:TXN) and a downgrade this morning on Micron Technology (NYSE:MU) combined for a one-two punch that sent the SOX index reeling. The Philadelphia Semiconductor Index is off more than 3.5% today, albeit still up an incredible 55% year-to-date.
The semis' strong run this year has been predicated upon a second-half earnings recovery, which would then turn into a full-bore cyclical upturn in 2004. But there are two problems at this juncture: 1) the sustainability of the current economic recovery is by no means a foregone conclusion (especially given recent signs of worsening unemployment); and 2) semis' valuations at this point are in nose-bleed territory, even when viewed through the lens of next year's earnings estimates.
So far, valuation hasn't mattered a whit for semi stocks, but the "v" word has a habit of sneaking up and mattering quite a bit when least expected. Right now, Intel (NASDAQ:INTC) trades for 27 times expected 2004 earnings; Applied Materials (NASDAQ:AMAT), 46 times; KLA Tencor (NASDAQ:KLAC), 30 times; Novellus (NASDAQ:NVLS), 57 times; and Texas Instruments, a forward P/E of 36.
Again, these are P/Es based on 2004 estimates -- guestimates, really -- which have already seen a number of increases of late as analysts have raced to upgrade these stocks.
While it remains to be seen exactly how the current economic recovery plays out and to what degree semiconductor fundamentals benefit, today's sell-off may be a sign that rising anticipation of a semiconductor upturn has already seen its peak.
