After a sharp rise in the shares of chip manufacturers since the dip in March, there is now little room for these companies to make mistakes. Investors have built a strong bullish case for the industry, hoping the segment will emerge unscathed from the recession caused by the corona virus.
The, which includes some of the world's largest chipmakers such as Intel (NASDAQ :), NVIDIA (NASDAQ 🙂 and Advanced Micro Devices (NASDAQ :), has risen approximately 55% since March, far above the 37% increase in the same period.
The latest signal from some of the best players in the industry is that this rally will get extra steam in the coming weeks.
Both Micron Technology (NASDAQ 🙂 and Xilinx (NASDAQ: NASDAQ 🙂 delivered strong sales forecasts on Monday, with each reporting their quarterly results on June 29. Their reports suggest that other semiconductor companies could experience a similar resurgence in demand if parts of the global economy stem from the pandemic block.
Micron, the largest US memory chip manufacturer, will amount to between $ 5.75 and $ 6.25 billion, well above Wall Street estimates.
The report increased Micron shares by more than 6% over the past two days. On Tuesday, the stock closed at $ 51.52, an increase of nearly 5% for the day.
Micron makes memory chips for PCs, but also for computers that store data on smartphones. Despite the COVID-19 pandemic, which has slowed hardware sales, the company is benefiting from those areas where those at home are creating new demand, such as increased use of e-commerce, online gaming, and streaming entertainment.
Xilinx, which makes programmable chips for wireless networks, reported for the fiscal first quarter of 2020, helped by more sales of chips handling online trading. The company also benefits from investments to build new fifth-generation, or 5G, wireless networks, which remains a major headwind for the industry.
On Tuesday, the stock closed at $ 98.39, up 7%.
"We believe that long-term semis will play a critical role in the new digital economy built on the processing, storage and networking capabilities enabled by this highly profitable, consolidated and disciplined industry", Bank of America research analyst Vivek Arya told customers in a recent post from CNBC.com
China Risks
However, with this optimistic view, the US-China trade dispute is one of the biggest risks to chip manufacturers in the coming days. Last month, the United States Department of Commerce limited the chip manufacturers worldwide using American technology to supply semiconductors to Huawei Technologies Co., a rule that covers virtually all builders of high-end chips.
China consumes about 35% of the global chip stock. American manufacturers, on the other hand, generate a large part of the income from China. For example, Intel gets nearly 30% of its revenues from the country.
The US trade war with China and the Trump administration's actions against the Chinese smartphone giant continue to heighten uncertainty, Micron's CEO Sanjay Mehrotra said during the conference call with analysts this week, adding that Huawei's ban our chances in the near term. "
The Chinese government has vowed to protect its national champion, with retaliation threats against US companies dependent on China, such as Apple (NASDAQ 🙂 and Boeing (NYSE :).
But according to Bank of America, China's influence in the semi-finals is "very limited". The Asian country is heavily dependent on the technology of the US and its Western allies. According to Arya:
"This is why we haven't seen (and probably won't see) major retaliation by China, even though its technology champion (Huawei) continues to face more American restrictions."
Bottom Line
Investing in chip stocks after this year's powerful rally no longer seems tempting to many investors, especially as trade tensions between the US and China rise again. But the economic fundamentals suggest that the demand for chips will continue to be strong, fueled by the expansion of 5G networks and compatible devices, as well as cloud computing service providers.
We believe chip stocks are still attractive, subject to geopolitical risk.
