Suddenly it is a completely different world for the high-flying semiconductor stocks. In just a week, the bull case for these chip producers has weakened considerably as the global economy is under pressure from the effects of the coronavirus outbreak.
After a strong rally in the past year, these chip makers struck hard this week as investors rushed to relieve their risky assets of concerns about the potential impact of the disease on global economic growth.
The, including some of & # 39; the world's largest chip makers, has lost more than 11% in a widespread sale in the last five trading days.
While analysts and economists are still struggling to understand the extent of the damage to the global economy caused by this rapidly spreading deadly virus, investors must be ready to see a steep correction in this market segment, where investors are very strong built in expectations.
In this uncertain situation, it is also important to recognize which chip shares are more exposed to this spell of weakness. In our opinion, Advanced Micro Devices (NASDAQ :), the topper of 2019, is at the top of this list.
After returning around 150%, the shares of AMD were the largest percentage gain among the stocks mentioned in the index last year. But now, after falling nearly 20% from the record high of $ 59.27 reached on February 19, the stock is already in a bear market.
Even before it was hit by the coronavirus-caused sale, AMD showed some signs of peaks. Last month, the Santa Clara, California-based company made a bleak prediction for current investors who were disappointed.
Sales in the first three months of the year will be around $ 1.80 billion, plus or minus $ 50 million, the company said, according to Bloomberg's average data, according to the average estimate of $ 1.87 billion .
Very rich appreciation
Another reason why AMD is more sensitive to persistent weakness in the stock markets is the company's premium valuation. With a gain of 30 times in the long term, AMD is one of the most valued chip shares and more than twice the average multiple of the semiconductor group.
Michael Binger, president of Gradient Investments, told CNBC last week that AMD shares were "very rich" and the company's exposure to the PC market makes it vulnerable. Microsoft (NASDAQ 🙂 yesterday lowered its quarterly outlook, referring to the coronavirus epidemic, which is slowing down the production of computers and shrinking the sale of a range of consumer services and electronics.
In a statement, the company said it did not expect to comply with earlier fiscal third-quarter guidelines in the Windows personal-computer software and Surface device business because the supply chain is expected to return at a slower pace than normal. That warning from & # 39; the world's largest software company is enough to show that things can get pretty ugly for hardware companies too.
AMD benefited from the continued strong demand for personal computers when companies upgraded to a new version of the Microsoft Windows operating system. AMD is the second largest maker of chips that is used in graphic computer cards.
To start its growth cycle, AMD released a large number of new products last year, focusing on its largest rival Intel (NASDAQ :), which is struggling to roll out the latest and most advanced chips.
In a series of new product releases, the company demonstrated its ability to gain a competitive advantage over Intel and could win the largest customers in the cloud computing market – which previously had few options but on Intel & # 39; s expensive products.
“Intel still has a lot of influence on this market and they can lower their prices. They can bring better products to the market, which is what I am most concerned about. … Would I buy it here today? No, I wouldn't do that, and I'd wait for that pullback. "Binger told the network.
Bottom Line
As we had warned in our January 9 article, AMD shares were prone to some correction after reaching the highest level for nearly two decades. Now that this withdrawal is underway, investors should not hurry to buy the shares.
But once the dust is dissolved, AMD will be a good choice for long-term investors, as the chip maker is slowly expanding its market share. Moreover, it is well positioned to take advantage of Intel's lapse.
