3 Semiconductor Stocks in the Spotlight: AMD INTC NXPI

Amid an earnings season that is projected to be the worst since 2009, semiconductor stocks face a double whammy. The broad markets are near record levels, but have shown pensiveness on the slow journey upwards. Many analysts are skeptical of the bull run, attributing momentum to purely technical factors.

3 Semiconductor Stocks in the Spotlight: AMD INTC NXPI

Semiconductor stocks specifically were among the worst-performing categories in the markets late last week. Due to sharp revenue losses by key players like Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (TSM), the industry faces additional scrutiny. Thus, the pressure is on for Advanced Micro Devices, Inc. (AMD), Intel Corporation (INTC) and NXP Semiconductors NV (NXPI) to deliver some good news.

That, of course, is easier said than done. While the benchmark exchange-traded fund Market Vectors Semiconductor (SMH) is in positive territory for the year, it’s a modest gain of only 3%.

To put that into perspective, it’s actually slightly less than the year-to-date performance of the S&P 500 SPDR (SPY) — an ETF that faces questions in light of macroeconomic weakness. Worryingly, the SMH moved up 6% last month but is actually down 1% so far in April.

Wall Street insiders have keyed in on this waning enthusiasm and have acted accordingly. Just recently, volume for SMH put options — bets taken against the semiconductor ETF — spiked up considerably. Of the top 10 holdings of the SMH, INTC is the heaviest weighted, while NXPI stock is eighth on the list. Since the purchased put options have an expiration date of May 16, someone is expecting a wave of bad news when AMD, INTC and NXPI release their first-quarter earnings results over the next several days.

But the pessimism for semiconductor companies is not limited to lack of technical performance in the markets. The biggest pressure comes in an all-too-familiar package — moribund personal computer sales. In fact, the bloodbath is a lot worse than many were anticipating. With global shipments of PCs falling nearly 10% in the first quarter of this year, this is the worst showing for the industry since 2007.

Consequently, Dell — which became a private company two-and-a-half years ago — overtook HP Inc. (HPQ) as the number one seller of PCs in the U.S. market. Ordinarily, beating out your rival for the top ranking is something to be celebrated. However, this switcheroo is more due to HPQ being unwilling to punch downwards than it is anything special on Dell’s part. Although Dell has shifted towards business-to-business sales, the reality is that in the retail markets, more people are eschewing PCs in favor of increasingly high-powered smart phones.

But even with smart phones, there’s a problem — namely, market saturation. The same issue that’s plaguing GoPro, Inc. (GPRO) is a thorn in the side for semiconductor companies. With so many companies offering homogenous-looking products, it’s no wonder that global smart phone sales are only expected to rise by single-digit percentages, clipping the trend of double-digit growth. And with this key market troubled, there’s not too many places where the semiconductors can pitch their services.

Needless to say, Wall Street is holding its collective breath as the big dogs — AMD, INTC and NXPI — get ready for their earnings showdown.

Semiconductor Stocks in the Spotlight: Advanced Micro Devices, Inc. (AMD)

Semiconductor Stocks in the Spotlight: Advanced Micro Devices, Inc. (AMD)

Inarguably, the one chip maker that has to do well is AMD. Earnings per share estimate for its Q1 of fiscal year 2016 lands at -13 cents, which shows how poor the consensus is towards the industry.

Even more striking is the fact that this is eight cents lower than the year-ago quarter, one which AMD badly missed. Back then, AMD stock dropped 43% of value in the markets before picking itself back up to its current price point. But if Wall Street doesn’t see something substantive this time around, AMD faces a more permanently bleak future

The harsh reality is that AMD is in competitive quicksand. As the perennial little brother to Intel, AMD has no choice but to bottom-feed the PC market. But to bottom-feed a market that is practically destined for obsolescence? That’s a mighty tough pill to swallow.

Sure, the product pipeline for AMD — in particular, its state of the art graphics card — is exciting from a techie’s perspective. It will also solidify the company’s standing as a premier manufacturer of gaming architecture. But will that be enough for investors to overlook the poor fundamentals for AMD?

At this point, it’s one of the most speculative ideas in the markets today.

Semiconductor Stocks in the Spotlight: Intel Corporation (INTC)

Semiconductor Stocks in the Spotlight: Intel Corporation (INTC)

On the other hand, we have INTC. On a year-to-date basis, INTC is down more than 8% — noticeably worse than some of its key rivals.

As the world’s biggest producer of semiconductors, the sales crash in traditional computer devices had an especially pronounced impact. So it’s more than peculiar that earnings per share for INTC is projected to hit 48 cents in Q1 FY2016 — the highest EPS target since FY2012.

Adding to the pressure are quarterly revenue trends, which were flat last year.

AMD, INTC, NXPI, earnings
Source: Source: JYE Financial, unless otherwise indicated

However, there is some optimism for a long-term transition. For the first time in decades, INTC recruited an outsider, Murthy Renduchintala of Qualcomm Inc. (QCOM), to become their engineering chief and president of a newly formed group. This division will focus on making INTC competitive in the mobile devices sector — something that Renduchintala is famous for.

While this is a strategy that is hardly surprising given the PC malaise, it’s also gamble that is more critical than many may appreciate.

INTC has largely been unsuccessful in the broad wireless sector, hampered by inconsistent offerings and cutthroat competition. If they don’t get this right, they risk losing credibility.

Internally, the hiring of Renduchintala to such a lofty position cascaded in several executives resigning, knowing that their chances of promotion have dimmed. The timing of such major changes ahead of its Q1 earnings is also suspect.

Semiconductor Stocks in the Spotlight: NXP Semiconductors NV (NXPI)

Semiconductor Stocks in the Spotlight: NXP Semiconductors NV (NXPI)

Finally, we come down to NXPI, which may be the smartest company among the three on this list. Merging with Freescale Semiconductor last year, NXPI has recently become the leading chip supplier to automobile manufacturers. This is a significant shift that has helped to offset losses incurred by NXPI in traditional semiconductor markets.

Better yet, so-called “smart cars” have huge potential. Already, modern vehicles carry the equivalent power of 20 PCs. In the rapidly approaching future, more cars will be able to perform driving functions without human intervention.

But for right now, does NXPI have enough in the tank to weather the semiconductor storm? Although NXPI is a very profitable entity, Wall Street is heeding some caution. EPS target for Q1 FY2016 is $1.09 — about 16% below the prior year’s consensus estimate of $1.30. NXPI has a long history dating back to at least 2012 of meeting or exceeding expectations, so things look positive on that front.

The biggest drag, however, is revenue. Although annual sales have shown consistent growth since 2011, quarterly revenue growth last year began to slide sharply against prior results. Overall, sales of standard semiconductor products have dropped 3% from last year.

To counter this, NXPI wants to be a major player in the wireless connectivity sector, but so does everyone else. For investors, it will come down to whether or not they believe NXPI can drive home its positive message while avoiding as many potholes as possible.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2016/04/semiconductor-stocks-amd-intc-nxpi/.

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