Fisher Investments Editorial Staff
US Economy

Channeling Chips

By, 11/20/2009

Story Highlights:

  • A prominent Wall Street firm lowered its 2010 forecast for the global semiconductor industry and downgraded the stocks of 10 chip-making firms.
  • The call is based on a predicted overshoot in global supply chain inventories.
  • If recovery surpasses current growth forecasts (as we anticipate it very well might), today's downgrade could prove unwarranted.

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A prominent Wall Street firm lowered its 2010 forecast for the global semiconductor industry Thursday morning on the indication supply of chips is outpacing demand. The report also featured downgrades for stocks of 10 chip-making firms, likely contributing to Thursday's market declines for the industry and broader indexes. This call was issued despite expectations for growing electronics demand and a positive growth outlook for global economies in the period ahead.

Specifically, the report cited a possible semiconductor inventory correction as the reason for the growth adjustment and stock downgrades. After allowing inventories to nearly deplete during the recession, firms have recently begun restocking at a faster-than-usual pace. If rapidly increasing inventories surpass actual consumption, a supply-chain disruption could negatively affect the firms' earnings and stock prices.

 

Despite the dour headlines, Thursday's research note wasn't solely negative on its outlook for the industry or the broader Technology sector. The revised industry stance still anticipated growth in the semiconductor industry to reach 18% next year on rising end demand amid global economic recovery. If that recovery surpasses current growth forecasts (as we anticipate it very well might), Thursday's downgrade could prove unwarranted.

 

It's important to note diverging views exist and the fundamentals for the industry remain positive. The PC supply chain (a key sales driver for chip-making companies) looks healthy, with lean inventory and a positive forecast for the quarter—and year—ahead. Recent positive earnings guidance from major industry players also contributes to the upward forecast. And as this new bull continues surging off March's market bottom, rebounding sentiment will likely continue boosting returns in this relatively elastic sector for some time.

 

Recovery is a rocky road, and aligning inventory estimates with demand after such a steep drop is still an imperfect science (despite technological advancements like just-in-time inventory management). Tech stocks were hit hard in the late stages of the recent bear market and have thus far recovered apace. As sentiment converges with positive fundamentals in the foreseeable future, supplemented by possibly better-than-expected global economic growth, prospects for the broader Tech sector are promising.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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