The semiconductor industry has been hit hard by the weak global economy, though some markets have been hit harder than others, particularly those tied to personal computers and smartphones.
And while sometimes the market has a tendency to lump companies together, in this case, it may be a case of the market cutting off its proverbial nose to spite its face, according to investment firm Wells Fargo.
Analyst Gary Mobley, who covers the sector for the firm, noted that overall results and guidance for the sector have been mixed,” with performance determined mostly by the companies respective end markets. Those that are tied to the consumer, including the PC and smartphone, have spoken about inventory draw-down and weak demand that should last “a few quarters.”
Conversely, those in the automotive and industrial space are seeing demand that appears to be holding up, even if the consensus view is that cracks will eventually show.
Not so fast, Mobley explained.
“In our view, the most important metric that may trigger improved investor sentiment for the chip group is the point in time when chip companies begin to ship to true end demand (vs. under-shipping in many cases as customer/distributor inventories are being brought down),” the analyst wrote in a note to clients. “We believe this equilibrium will occur in [the first-half of 2023].”
Among companies with favorable outlooks are those in the electronic design automation, or EDA, space, including Cadence Design Systems (NASDAQ:CDNS) and Synopsys (SNPS). Also viewed favorably are companies that generate an “outsized portion” of their revenue from the automotive space, including Ambarella (AMBA), NXP Semiconductors (NASDAQ:NXPI), ON Semiconductor (NASDAQ:ON) and Wolfspeed (WOLF).
Mobley also noted that inventories rose once again in the third-quarter, and in some cases, were above “normalized levels” as sales continued to disappoint in certain markets, such as smartphones and PCs.
However, this is not an issue for every semiconductor company, as markets where unit sales are continuing to improve and normalize, rising inventories should not be seen as quite alarming.
Despite all of this, as well as worries over inflation, estimates have come down for a lot of areas in the semiconductor industry, as have valuations, Mobley explained.
“It is important to point out that these dynamics remain fluid, and until consumer spending stabilizes around the globe, there may be more downside to these views,” the analyst wrote, adding that if China relents on its zero COVID policy, there could be upside in both the PC and smartphone spaces.
Even if they don’t it’s likely that the automotive semiconductor market, and companies that are heavily focused on it, could see “strong demand in both the short and long term,” as vehicle inventories are still strained and there could be pent-up replacement demand.