Semiconductors Winners And Losers Heading Into Q2 2024

seekingalpha04-03

Q1 2024 has passed and several of the predictions made at the start of 2024 are starting to play out as anticipated going into Q2 2024.HPC plays have been winners thus far in 2024 and those exposed to...

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The stock market hit record territory in Q1 2024, but semis were still able to outperform most sectors. Still, not all semis are doing well and some are doing much better than others. Why will be covered next. The rally in semis continues A previous article at the start of 2024 ended with several predictions as to how the year 2024 was likely to play out. The Federal Reserve, for instance, was singled out as the key swing factor for semis. In fact, Fed policy has demonstrated an ability to override all else. Recall how semis did much better in the latter part of 2022 than the early part of 2022, even though earnings/guidance/outlook were much better in early 2022 than in late 2022, and this coincided with the Fed switching from a very hawkish stance in early 2022 to a more dovish stance in late 2022. The Fed has taken on a pivotal role by holding out the prospect of monetary easing by lowering the Fed Funds Rate or FFR in 2024, as laid out in the latest dot plots. By doing so the Fed triggered a huge rally in Q4 2023 that remains in force at the start of Q2 2024. Almost all stocks stand to benefit, but a dovish Fed policy is especially bullish for semis since they tend to outperform during stock market rallies. With this backdrop, semis exposed to high-performance computing or HPC were chosen as the segment most likely to outperform, especially with the added boost from the boom in artificial intelligence or AI. In contrast, semis exposed to the automotive segment were picked as the ones most likely to underperform. However, the article also cautioned that the Fed is not likely to be able to ease as much as the market is expecting with inflation likely to be more sticky due to various reasons explained in greater detail in the article. The Fed has the ability to trigger rallies, but it also has the ability to trigger selloffs in the stock market, depending on whether it is perceived to be leaning hawkish or dovish. The latter is relevant to semis because while semis tend to rise more than most during stock market rallies, semis also tend to drop more than most during stock market selloffs. Volatility would thus become the name of the game in 2024. Source: Thinkorswim app Q1 2024 is done and semis are a definite winner in the early part of 2024. The chart above, for instance, shows how the iShares Semiconductor ETF (SOXX), an ETF representing 30 companies active in the semiconductor space, has gained 17.65% YTD. In comparison, the SPDR S&P 500 ETF Trust (SPY) has gained 10.05% and the Invesco QQQ Trust ETF (QQQ) has gained 8.42%. Semis have outperformed most. Note how the rally in SOXX started in early November after the Fed signaled a pivot towards an easing of monetary policy through lower interest rates. SOXX has since trended higher by following the ascending trendline in the chart. There have been numerous instances of SOXX coming close to breaking through the trendline, but the trendline has held each time. While trends can change, the existing one remains bullish by pointing higher for semis. Who was hot and who was not among semiconductor stocks Still, not all semis are likely to look back fondly at Q1 2024. Some did great, but others lagged far behind. A look at the individual stocks within SOXX shows as much. The 30 stocks represented in SOXX are NVIDIA Corporation (NVDA), Broadcom Inc. (AVGO), Advanced Micro Devices, Inc. (AMD), QUALCOMM Incorporated (QCOM), Intel Corporation (INTC), Micron Technology, Inc. (MU), Microchip Technology Incorporated (MCHP), Texas Instruments Incorporated (TXN), Lam Research Corporation (LRCX), Analog Devices, Inc. (ADI), KLA Corporation (KLAC), Applied Materials, Inc. (AMAT), NXP Semiconductors N.V. (NXPI), Marvell Technology, Inc. (MRVL), Taiwan Semiconductor Manufacturing Company Limited (TSM), ASML Holding N.V. (ASML), ON Semiconductor Corporation (ON), Monolithic Power Systems, Inc. (MPWR), Entegris, Inc. (ENTG), Skyworks Solutions, Inc. (SWKS), Teradyne, Inc. (TER), STMicroelectronics N.V. (STM), Qorvo, Inc. (QRVO), Lattice Semiconductor Corporation (LSCC), MKS Instruments, Inc. (MKSI), ASE Technology Holding Co., Ltd. (ASX), Rambus Inc. (RMBS), United Microelectronics Corporation (UMC), Wolfspeed, Inc. (WOLF) and Axcelis Technologies, Inc. (ACLS). The table below shows their gains or losses.   Stock Weight % Change - 12 months Change - 6 months Change - 3 months Change - 1 month Change - YTD   NVDA 8.78% +242.13% +112.76% +82.84% +16.34% +82.46%   AVGO 7.84% +112.17% +62.27% +17.69% +2.79% +18.74%   AMD 7.21% +90.87% +84.04% +23.56% +2.24% +22.44%   QCOM 6.44% +39.53% +55.05% +16.18% +8.63% +17.06%   INTC 6.16% +50.80% +27.62% -12.98% +5.19% -12.10%   MU 5.01% +98.87% +72.83% +36.04% +31.41% +38.14%   MCHP 4.11% +15.22% +17.27% -1.55% +9.16% -0.52%   TXN 4.01% -1.85% +10.16% +1.74% +6.85% +2.20%   LRCX 3.98% +100.29% +58.26% +22.22% +5.30% +24.04%   ADI 3.97% +7.73% +14.46% -0.78% +5.34% -0.39%   KLAC 3.94% +88.29% +56.78% +18.11% +3.80% +20.17%   AMAT 3.94% +77.17% +52.70% +25.59% +4.40% +27.25%   NXPI 3.82% +43.05% +25.96% +6.75% +1.55% +7.88%   MRVL 3.81% +75.23% +34.88% +15.70% +4.95% +17.53%   TSM 3.75% +49.82% +59.23% +30.00% +6.81% +30.82%   ASML 3.62% +51.70% +68.92% +27.02% +3.30% +28.21%   ON 3.25% -3.89% -20.10% -13.52% -3.82% -11.95%   MPWR 3.23% +42.60% +53.55% +6.42% -4.67% +7.39%   ENTG 2.19% +84.90% +57.29% +15.58% +6.78% +17.29%   SWKS 1.80% -4.40% +12.48% -5.32% +6.38% -3.65%   TER 1.79% +8.27% +16.95% +1.88% +12.44% +3.97%   STM 1.20% -12.59% +2.95% -15.05% -3.74% -13.74%   QRVO 1.15% +17.64% +21.44% +0.19% +2.48% +1.97%   LSCC 1.11% -12.76% -6.30% +9.72% +6.75% +13.39%   MKSI 0.92% +59.99% +59.26% +27.13% +11.37% +29.29%   ASX 0.74% +44.42% +48.92% +16.54% +15.32% +16.79%   RMBS 0.69% +42.12% +13.50% -9.75% +8.71% -9.44%   UMC 0.63% -5.93% +17.08% -6.58% +7.29% -4.37%   WOLF 0.38% -51.39% -21.44% -36.57% +15.46% -32.20%   ACLS 0.37% -10.59% -29.34% -16.28% +0.72% -14.01%                   SOXX   +60.90% +46.27% +16.56% +6.75% +17.65%   QQQ   +44.65% +25.12% +7.90% +2.01% +8.42%   SPY   +32.22% +22.77% +9.77% +3.32% +10.05%   Click to enlarge Source: iShares It's early in the year and things can change, but the table shows why the previous article was right to pick HPC plays as the semis most likely to outperform and those semis exposed to the automotive segment as most likely to underperform in 2024, because that is how it has played out thus far heading into Q2 2024. All the top performers in the list are exposed in some way to the HPC market. One prominent HPC name, though, that has not done well is INTC with a YTD loss of 12.1% due to various company-specific issues. Still, INTC is up 50.8% TTM. In general, most on the list did well, but NVDA was the clear frontrunner with a YTD gain of 82.46%, which should come as no surprise since NVDA has held this position for several quarters. Trailing well behind were runners-up MU with a YTD gain of 38.14% and TSM with a YTD gain of 30.82%. Note that MU can credit a late dash towards the finish line with a 31.41% gain in March to help it overtake other semis, which came after the stock soared higher following the latest earnings report in late March. All three can credit their outperformance primarily to investor enthusiasm towards potential AI plays, and HPC in general, but this is especially true of NVDA. AI is the reason why NVDA gained 242.13% in the past 12 months, tops among the 30 stocks in SOXX. NVDA, AVGO and LRCX are the only three to have at least doubled their stock price in the past year. AVGO is another HPC play and LRCX, together with other leading suppliers of semiconductor manufacturing equipment, particularly for leading-edge process nodes, like AMAT, KLAC and ASML, continue to be the beneficiaries of the unprecedented expansion of fab capacity worldwide as elaborated on in the article linked earlier, much of it at the behest of government policy in many countries. At the other end of the spectrum is WOLF with a YTD loss of 32.2%, ACLS with a YTD loss of 14.01%, STM with a YTD loss of 13.74% and ON with a YTD loss of 11.95%. All can pin most of the blame on declining fortunes in the automotive market, especially the electrical vehicle or EV market, which led to a reduced demand for automotive-grade chips and power semiconductors in general, a market that was until fairly recently red-hot. WOLF, for instance, was long thought to be a winner in the EV space due to the perceived need for SiC, but the slowdown in the EV market at a time when the supply of SiC is soaring, not to mention a very shaky income statement and balance sheet, have all contributed to put WOLF last, on a YTD basis and on a TTM basis. How strong is the foundation underpinning the rally in semis at the start of Q2 2024? As covered in greater detail in the prior article, the rally in semis was made possible by three main tailwinds. Fed policy is the most important one as mentioned earlier, in addition to the rush to cash in on the AI boom, but an expected return to growth in the semiconductor industry in 2024 has also helped strengthen the bull case for semis. Of these three factors, the AI factor remains as strong as ever and there are no signs this will change anytime soon with interest in AI as high at the start of Q2 2024 as it was as the start of Q1 2024. SOXX can be expected to reap the benefits from buyers bidding up stock prices of those companies exposed to AI. However, while the other two factors are present, they are more of a mixed picture with Q1 2024 in the rear view. The year 2024 is expected to be a strong year for companies active in the semiconductor space. Most industry forecasts settled on the semiconductor market growing in the low to high teens in 2024 and some market segments like DRAM have indeed gotten stronger in the new year, although from a very low base. HBM memory, for instance, associated with server GPUs for AI use, may be the hottest chips out there. On the other hand, it's worth noting that other segments like the analog market seem to be getting weaker. This has affected the likes of ADI, TXN and MCHP. Most market segments have yet to show much change in terms of end-user demand and while this is expected to change in H2 2024, overall demand for semiconductors will have to step it up from where it is at the present if 2024 is to end up as good a year as the more optimistic forecasts have predicted. Could Fed policy change due to sticky inflation? However, the most important factor that has the ability to sway semis in either direction remains Fed policy. The Fed went into 2024 with a decidedly dovish outlook with the dot plots calling for the FFR to be cut by 75 basis points in 2024. The market was even more optimistic with expectations of twice that amount or a reduction of 150 basis points. However, as stated before in the prior article, there is reason to believe the Fed will not be able to ease as much as the market is hoping for and this is starting to look like the correct call with the market not getting the first rate cut in March as anticipated. The FFR remains at 5.25-5.50% and Fed Funds futures now believe June is when the first rate cut is most likely to come. Still, it is early in the year and the latest dot plots from the Fed are unchanged in the sense they still expect the FFR to go down by 75 basis points in 2024 with further cuts in 2025. Fed policy thus remains a powerful tailwind supporting higher stock prices for semis. If this is to change, the Fed will need to turn a lot more hawkish. Semis have rallied towards Q2 2024, but if there is to be a selloff it will most likely be because of a change in Fed policy. It's thus worth noting that while inflation still seems to be heading down, most readings have inflation coming in hotter than expected in the early part of 2024. This could continue with, for example, crude oil prices widely expected to increase in the coming months for a host of reasons, especially geopolitically. Why China is a risk factor for semis in 2024 If sticky inflation is the biggest wild card for semis due to its potential to influence Fed policy, then China is a much more distant second. The previous article singled out China as the most likely source of curve balls for the industry and with one quarter done in 2024, this too is starting to look justified since China has already made itself heard in several ways. According to a recent report, for instance, the Chinese government has begun the phasing out of foreign CPUs in favor of locally made ones. This includes those from INTC and AMD. It's worth mentioning that this policy should not come as a surprise. China actually revealed its intention to gradually switch to domestic CPUs several years ago. Note that this policy applies to government use only. Non-government users are free to choose, although this could change of course. The transition was to happen in stages and it looks like the final phase has begun with the full removal of CPUs of non-Chinese origin. So China's move did not come out of the blue, yet the decision is still noteworthy because it indirectly says something about where China is in terms of its semiconductor industry, which is increasingly in direct competition with established players, including those in SOXX. China is working on developing alternatives for pretty much everything, and this has only increased since the rise of U.S.-China trade tensions and the implementation of export controls by the former. So the recent news out of China suggests Chinese-developed CPUs have reached a stage where they are capable enough to be used as substitutes or China would not proceed with its policy of insourcing if it did not have viable alternatives. This fits in with recent reports of Chinese companies like Loongson and Zhaoxin announcing new high-end CPUs that are claimed to be comparable in performance to CPUs from INTC and AMD of a few years ago like the Zen 3. Furthermore, high-end CPUs are made using advanced process nodes, at least 14/16nm and preferably smaller, which suggests China has the ability to manufacture semiconductors at those nodes. Otherwise, China would have no way of implementing the phase-out of foreign CPUs, in addition to other types of semiconductors that also require leading-edge nodes. All this requires sufficient production capacity. China being able to manufacture chips at the leading edge could have far-reaching consequences for the semiconductor industry and beyond. Apple Inc. (AAPL), for instance, was arguably the company most to benefit from the forced absence of China's Huawei in the high-end smartphone market, a major driver of semiconductor demand. Apple should now expect the process to reverse with Huawei increasing production of high-end smartphones to compete for market share against those from AAPL, which in turn has a domino effect. Many semis like QCOM, SWKS and QRVO depend on AAPL for a significant part of their sales, so if AAPL sees demand go down due to Huawei, they will likely as well. Recent reports suggest AAPL sales are falling in China and if China can manufacture advanced chips at scale and at good yield, then there may be legs to AAPL struggles in the China market and perhaps abroad as well. This could lead to weakness for a number of semis in the coming quarters, especially in late 2024 since that is when the mobile segment is at its peak. How China can be a source of volatility China's ability to inject volatility into the semiconductor industry depends on its ability to advance its own domestic chip manufacturing capabilities and there are signs China is getting there. The U.S. government has been seeking to restrict China's abilities, but the results have been less than satisfactory. This explains why the U.S. government is forced to try again with new restrictions since the preceding ones did not have the results expected. The U.S. government is now seeking to tighten the restrictions on the servicing of advanced manufacturing equipment for semiconductors, lithography especially, and it wants companies in allied countries like Japan and the Netherlands to comply. ASML in particular is a key focus. This is part of the reason why the Dutch Prime Minister paid a visit to China in the past few days. What's interesting about the talks is that the Chinese President reportedly told the Dutch Prime Minister that with or without ASML, progress of China's semiconductor industry will not be stopped. In doing so, the Chinese President may have send a message to those calling for ASML to cease the supply and servicing of lithography equipment to China. It is believed that this move is the answer as to how to stop China's semiconductor industry. Lithography equipment is just one of many pieces of equipment needed to manufacture semiconductors, but it is the one generally regarded as the most technically challenging. It is known that China is working on its own lithography equipment, including its own implementation of EUV. Various technical papers/patents about specific components like light sources make this clear and there is no dispute about it. What is in dispute is how far China has progressed and there are many out there who have given their take on the issue. Where China is therefore depends on who you ask. China's arguably deliberate hiding of accurate information about the key players involved only makes it more difficult to differentiate between what is true and what is false. China's SMIC is one example of the radio silence. There is clear evidence SMIC is capable of producing chips three nodes more advanced than the 14nm it is officially limited to, yet SMIC will neither confirm nor deny anything when asked. The recent statement from the Chinese President is therefore significant because he is someone in a position to know, unlike others who have given their opinion without having access to that kind of closely guarded information within China. The statement suggests China has domestic alternatives to advanced lithography equipment that it was thought not to possess. It's possible he is bluffing in order to stave off further restrictions, but keep in mind that China has already demonstrated far more ability than expected. The FinFET fab in Shanghai, for example, should have been affected by U.S. rules implemented in October 2022, which includes prohibiting the servicing/maintenance of equipment by U.S. suppliers, but the fab continues to operate to this day even though 18 months have passed. Not only that, there is evidence production is being expanded. This would be needed to produce alternative supplies to implement, among other things, the recent banning of foreign CPUs. If we then read between the lines all the messaging out of China, including the replacing of high-end non-Chinese semiconductors, the visible expansion of advanced fabs as seen on satellite photos and statements from the Chinese President himself, then there is reason to believe China may be much further ahead in being able to satisfy local demand for semiconductors. If China needs to buy less due to being able to make more on its own, then all this points to more headwinds for the semiconductor industry out of China. H2 2024 is expected to see strong growth for semis, especially with seasonal factors in tow, but China may be a disrupting factor. Add China to a Fed that may be forced to abandon the cutting of interest rates due to higher inflation and the conditions are there for volatility to take it up to another level. Investor takeaways Semis head into Q2 2024 with the existing trend in their favor. This trend has supported higher prices for semis as a group since Q4 2023 and, while the trend has come under pressure numerous times, it remains intact with Q2 2024 upon us. The key tailwinds supporting the march higher are still there to help semis as a whole. The Fed, AI and expected growth in semiconductor demand are still there to push semis higher. Q2 2024 is therefore most likely to see further gains for semis, but likely not as much as in Q1 2024. Keep in mind Q2 tends to be weaker for semis historically. Individually, some semis are underperforming, particularly those exposed to the analog market. In contrast, those seen as highly exposed to the AI market are benefiting from capital pouring in. Granted, some might argue valuations are too high for semis, but that does not mean it cannot continue. Not with the Fed ensuring there is excess liquidity sloshing around with which to speculate. HPC plays look to be the best bet for long positions, as stated at the beginning of 2024. On the other hand, the EV market has room to decline further and that could be enough to draw related semis lower. Still, there is merit when people argue against buying with the stock market at record highs and perhaps due for a correction after the massive rally starting in late 2023. Some might therefore want to stay clear of semis for the time being. On the other hand, those who do not want to stay on the sidelines, but have reservations about the recent rally, may want to consider an alternative in long/short trading pairs. This approach can pay off regardless of whether semis continue to go higher or undergo a correction. Long AMD/short INTC is one example, but SWKS/QRVO or TXN/ADI are also suitable candidates if one is looking to hedge against a rally in semis that may be getting long in the tooth going into Q2 2024. Some sort of protection is probably needed after all the big gains in the last six months. If there is a major correction, which would not be so out of place after stocks have run up as much as they have since November 2023, then it is most likely to happen in H2 2024 towards the end of the year. Seasonally the time is right since many major stock market selloffs have occurred in late Summer/early Fall. It's also when the U.S. elections are set to be held and that could also trigger a selloff in semis that could see them surrender most if not all their YTD gains. H2 2024 is forecast to see strong growth in semiconductor demand and expectations will thus be at their highest, which increases the likelihood of disappointment if semis fall short, possibly due to China playing a key role. Most importantly, the Fed will have a decision to make as to interest rate cuts by that time. Odds are the fed will not be able to deliver as many cuts as the market expects in 2024 due to sticky inflation driven higher by geopolitical tensions. This will be poorly received by stocks, including semis, which have rallied primarily on the back of promised rate cuts, but the Fed will likely throw the market a bone by promising future cuts to limit the fallout of not being able to honor the promise it made.  Nonetheless, the above will cause volatility to jump higher. The best bet at the start of Q2 2024 may be to bet on higher volatility for reasons described earlier. There are many options to choose from to place bets, including some listed earlier, but if one is to place just one bet, then the bet most likely to turn out to be the correct one is to bet on higher volatility.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2424294070"}