4 Chip Stocks With Big Near-Term Headwinds

chip stocks - 4 Chip Stocks With Big Near-Term Headwinds

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If anything has become abundantly clear over the past several months, it is that the once red-hot global semiconductor market is starting to rapidly cool.

Smartphone demand is drying up. Cryptocurrency mining demand is almost all gone. And the secular growth narratives in cloud and Internet of Things (IoT) are pausing due to trade war tensions and over-capacity issues.

That’s a bad sign for chip stocks. To be sure, they’ve already dropped in a big way. The iShares Semiconductor Sector Index ETF (NASDAQ:SOXX) is in bear market territory. But, a recent sizable and rare guidance cut from Apple (NASDAQ:AAPL) coupled with the first month-over-month decline in global semiconductor sales in nine months, implies that chip stocks are due for further weakness ahead.

At some point, this big selloff in chip stocks will turn into a buying opportunity. But, not yet. The trade war is the heart of most of these demand issues. Thus, until a resolution is reached in the trade war, chip stocks will likely trade weaker for longer.

With that in mind, here’s a list of four chip stocks with huge near-term headwinds that should follow a “weaker-for-longer” pattern.

Broadcom Stock Is a Winner With Big Upside Potential

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Broadcom (AVGO)

In early 2019, Apple fired a warning shot heard around the world. The company basically said that due to escalating trade war tensions, emerging markets, particularly China, have been much weaker than expected over the past several months. Consequently, Apple has sold fewer iPhones globally than initially expected.

That’s a big deal for Broadcom (NASDAQ:AVGO). The best way to explain why is through the following quote pulled from Broadcom’s most recent 10-K Filing:

“We believe aggregate sales to Apple … accounted for approximately 25% of our net revenue for fiscal year 2018 … The loss of, or significant decrease in demand from, any of our top five end customers could have a material adverse effect on our business, results of operations and financial condition.”

Essentially, Apple is by far and away Broadcom’s largest customer, and Apple just said that this quarter was miserable on the iPhone front. That means this quarter was miserable for Broadcom, too. That’s why AVGO stock fell almost as much as AAPL stock after the announcement.

The bull thesis here is that AVGO stock, at just 10X forward earnings, is pretty cheap. That is true. The low valuation lends itself to a nice bounce-back rally when smartphone demand stabilizes. But, that won’t happen until a trade war resolution is reached. Thus, until that happens, AVGO stock will remain weak.

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Universal Display (OLED)

Another company with huge dependence on the stalling out smartphone market is leading-OLED screenmaker Universal Display (NASDAQ:OLED).

In a nutshell, OLEDs are the next-generation of LED smart screens that are thinner, more flexible, and display deeper and more vibrant colors. Because of this, the OLED revolution has been gradually gaining traction across the entire smart screen space, and Universal Display stock has been a big winner.

But, smartphones were a cornerstone of this OLED revolution. Thus, as reports began to trickle out that the new generation of OLED smartphones were selling worse than anticipated, Universal Display stock dropped, from $200 in early 2018, to under $100 today.

Eventually, this stock will rebound. OLED screens are the future, and there’s plenty of growth potential outside of the smartphone market. But, for the time being, the smartphone market is the big driver of OLED sales. Thus, so long as the smartphone market globally remains weak, Universal Display stock will remain weak, too.

Lumentum (LITE)

Much like the first two stocks on this list, shares of opticals giant Lumentum (NASDAQ:LITE) will be pressured for the foreseeable future by weaker-than-expected next-generation smartphone demand.

Lumentum really burst onto the scene by being the company that provides the technology behind the iPhone’s new Face ID feature. As a result of this partnership, Apple jumped to comprise 30% of Lumentum’s net revenue in fiscal 2018, with most of that revenue coming from newer iPhone models.

But, those newer iPhone models aren’t selling all that well right now, nor are they going to sell all that well anytime soon. Trade war tensions, a slowing global economy and smartphone market saturation are all weighing on demand. Naturally, seeing as 30% of Lumentum’s revenues stem from those new iPhones, that’s a big hit for Lumentum’s operating results.

Much like the other stocks on this list, the bull thesis on LITE stock is that it’s cheap enough, so that when smartphone demand turns around, the stock will jump. But, smartphone demand isn’t going to turn around anytime soon, meaning that LITE stock will remain weak for the foreseeable future.

Investors Won't Believe the Micron Stock Hype Without Evidence

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Micron (MU)

Memory chipmaker Micron (NASDAQ:MU) has been showing cracks in its core DRAM and NAND markets for some time now. Essentially, supply has been catching up to demand, revenue growth has been decelerating, and margins have been eroding.

Apple’s big guidance cut and the bearish read on semiconductor sales in November are further blemishes on Micron’s growth narrative. Micron had warned about weakening high-end smartphone demand on its recent conference call, and management cited slowing smartphone demand as a big driver of falling DRAM and NAND prices.

It appears as though smartphone demand is weakening at a more rapid rate than anyone anticipated, Micron included. That means next quarter’s numbers will likely come in below expectations, and/or estimates will trend lower into the print. Either scenario will result in MU stock staying lower for longer.

As of this writing, Luke Lango was long AAPL.

Article printed from InvestorPlace Media, https://investorplace.com/2019/01/chip-stocks-to-sell-headwinds/.

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