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Is The Chip Cycle Peaking? Analysts Debate Semiconductor Stocks

Wall Street analysts are playing a guessing game over when the current uptrend in the chip cycle will inevitably end. Some say the industry is midway through its current growth cycle while others see the business peaking now with a downtrend ahead. Meanwhile, prospects for semiconductor stocks hang in the balance.




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On Monday, semiconductor stocks tumbled along with the broader market indexes. The Philadelphia semiconductor index, known as SOX, dropped 2.5% in morning trading on the stock market today. The SOX includes 30 semiconductor stocks.

The semiconductor industry is seeing signs of flat to decelerating growth, Mizuho Securities analyst Vijay Rakesh said in a note to clients Sunday.

“The recent cooling of semiconductor demand could continue through the rest of the year, as constrained supply chains and shortages have continued to impact (the automotive and industrial markets), especially with slowing trends in China,” Rakesh said.

‘Best Ideas’ In Semiconductor Stocks

Among semiconductor stocks, Rakesh prefers names tied to 5G wireless and the recovering enterprise market. He likes Broadcom (AVGO), Nvidia (NVDA), Qorvo (QRVO), Qualcomm (QCOM) and Skyworks Solutions (SWKS).

Truist Securities analyst William Stein believes the third quarter will be the peak of the current chip cycle. However, the semiconductor industry will still see healthy sales well into next year, he said.

“We continue to believe that Q3 marks the ‘true’ peak of the fundamental semi cycle” based on year-over-year sales growth, he said in a note to clients on Friday. “Semi companies are likely to continue to post upside in Q3, Q4, and into 2022, and supply will not catch up with demand until at least late 2022, potentially later.”

Of the semiconductor stocks he covers, Stein rates Nvidia and Monolithic Power Systems (MPWR) as his “best growth ideas.”

Stronger-For-Longer Chip Cycle

BofA Securities sees the good times continuing for semiconductor stocks.

“We remain firmly in the stronger-for-longer camp for semis given their critical role in the rapidly digitizing global economy and the newfound pricing power and supply discipline of this remarkably profitable industry operating with a very lean supply chain,” BofA analysts said in a note to clients Friday. “We expect above-trend growth to last through next year.”

BofA analysts see hot spots of growth for chips in artificial intelligence, cloud computing, 5G wireless, gaming and other markets. They see automotive chip sales picking up as supply chain shortages are resolved.

Investors Worry About Oversupply

Investors in semiconductor stocks are concerned that chip shortages could result in double ordering and eventually an oversupply. But many analysts think chipmakers have learned from past semiconductor cycles and are smarter about supply dynamics now.

“Inventory levels remain lean and double ordering remains a concern, though we suspect there is very little double fulfillment,” Evercore ISI analyst C.J. Muse said in a recent report. “Eventually lead times will begin to shrink and this will remain a worry for investors.”

He named Analog Devices (ADI), Marvell Technology (MRVL) and Nvidia among his “top picks” in semiconductor stocks.

Rosenblatt Securities analyst Hans Mosesmann believes the semiconductor industry is experiencing “the Mother of All Cycles.” The current uptrend in the chip cycle could be stretching beyond the usual period of six quarters, he said. The current cycle might peak in the first half of 2022, Mosesmann said in a recent report.

“We believe demand dynamics in 2022 continue to be strong in data center, communications, industrial, and automotive as enterprise starts to recover starting in the fall of 2021,” Mosesmann said. “We see the PC market to be relatively solid after a year of hyper growth led by work-from-home dynamics.”

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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