Stock Market Crash Warning: Don't Get Caught Holding These 3 Semiconductor Stocks – InvestorPlace
These 3 chip makers face competitive headwinds
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U.S. equities posted some gains last week, which I’m sure was refreshing to see given the sell-off a week prior. The S&P 500 and Nasdaq Composite gained 2.7% and 2.2%, respectively. This brings their respective year-to-date gains up to 6.9% and 4.0%. Unfortunately, market risks still remain. Not only do we still need inflation to come down consistently, but some U.S. equities, like semiconductor stocks, are still technically trading at relatively expensive multiples, and may be stocks to avoid, for now at least.
In terms of semiconductor stocks, some may see a bright spot in the market. I would press for caution. Even though, TSMC (NYSE:TSM) posted a solid Q1, we must keep in mind, the contract chip manufacturer’s upbeat earnings and guidance are entangled with the blooming artificial intelligence chip market. Not every semiconductor company is poised to benefit from AI, as they have their own manufacturing issues or have products embedded within other end-markets. Below are three semiconductor stocks to avoid as the potential for a market crash remains in our midst.
The electric vehicle (EV) slump is a real phenomenon. Although, it’s not affecting every electric vehicle manufacturer in the same manner. A slew of Chinese EV makers, as an example, have posted better than expected first quarter results. Tesla (NASDAQ:TSLA), on the other hand, has continued to disappoint. However, the slowdown in the EV market does not just impact cars manufacturers. Since so many semiconductor products help power so many of today’s newer vehicles, investors would do well to avoid semiconductor companies with a large EV end-market. This includes a chip firm called Wolfspeed (NYSE:WOLF).
The semiconductor firm uses gallium nitride and silicon carbide to create materials that eventually become inputs products for EVs, fast charging and wireless technologies. In their Q2’2024 earnings report, revenues increased year-over-year and beat Wall Street estimates, but Wolfspeed’s net loss expanded due to “underutilization costs” related to a new production facility its building. While in the long-term added production will likely be a value-add, the short-terms whims of the market might not regard the further loss in net income so optimistically.
WOLF shares have fallen nearly 40% on a year-to-date perspective. EV demand will probably remain lackluster until rates come down sufficiently, so even the medium-term headwinds for Wolfspeed’s business may be in jeopardy.
Intel (NASDAQ:INTC) has given shareholders mixed share price performance in recent years. Last year was, broadly, a great year for semiconductor stocks, especially those that traded at low valuations. Intel’s share price nearly doubled in 2023. There was a lot of AI hype driving shares higher as market-watchers and traders speculated what the legacy chip maker would be able to bring to the new space.
Unfortunately, for Intel, in 2024, the stock has gone back to being a disappointment. INTC has plummeted over 30% year-to-date. Weak guidance following Intel’s Q1 earnings report put a lot of pressure on shares. The chip maker’s earning report as a whole was mostly positive, although there was clearly slack in both its Foundry and Data Center and AI businesses, which are both facing enormous competitive risks.
For these reasons, Bank of America and Goldman Sachs decided to significantly lower their price targets. Goldman Sachs also reiterated its “Sell” rating.
While these competitive disadvantages exist, Intel is probably not the stock to hold, particularly as risks of a market crash mount.
Texas Instruments (NASDAQ:TXN), although a legacy chipmaker, deserves its entry on my list of semiconductor stocks to avoid. The semiconductor firm just has not been able to properly diversify into high growth end-markets that would earn it a spot in anyone’s portfolios. Texas Instruments deal in two business segments: Analog and Embedded devices. The former happens to be the larger segment of the two and deals with devices that help manage power in a variety of electronic devices. Continued soft demand in this end market led to TXN posting a 16% decline in revenue for their Q1 2024 earnings print.
The electronics sectors are still rebounding from last year’s chip glut. Chip firms like Nvidia (NASDAQ:NVDA) and TSMC are not increasing revenue and profits based on a revitalized sector; rather, they’re tapping into new sectors of growth, namely AI. Without diversification into higher growth end-markets, it’s quite likely Texas Instruments will continue to deliver lukewarm growth and profits.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.
Semiconductor, Technology
Article printed from InvestorPlace Media, https://investorplace.com/2024/04/stock-market-crash-warning-dont-get-caught-holding-these-3-semiconductor-stocks/.
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