While the semiconductor space skyrocketed in large part due to burgeoning demand from artificial intelligence (AI) applications, Thursday saw a marked decline in sentiment, thus yielding the question, why are chip stocks down today? Mostly, the negative catalyst centered on the contract manufacturing and design company Taiwan Semiconductor (NYSE:TSM).
Fading roughly 5% in the afternoon session, TSM stock reacted negatively to the underlying enterprise’s woeful revenue guidance. According to The Wall Street Journal, the top line may erode as much as 16% in the second quarter due to a weak global economy and high energy prices sapping demand from customers.
Specifically, the world’s biggest contract chip manufacturer stated that Q2 sales may land between $15.2 billion and $16 billion. Such an outcome would contrast sharply with the $18.16 billion posted in the year-ago quarter.
As if that wasn’t enough, Taiwan Semi CEO C.C. Wei remarked during an earnings call with analysts that the company will likely post a low- to mid-single-digit percentage decline in full-year sales. That’s a gloomier outlook than the one he provided in January, the WSJ reports.
Further, management also stated that it will leave its full-year capital expenditure budget unchanged. Unfortunately, this framework contrasted with market expectations that Taiwan Semi would cut spending.
Why Are Chip Stocks Down Today? Blame the Belt Tightening
While the red ink mostly targeted TSM stock, rival players suffered from the fallout. Perhaps most conspicuously, high-flying Nvidia (NASDAQ:NVDA) — which benefitted handsomely from the hype train — got hit by a nearly 3% loss. So, why are chip stocks down today? Basically, consumers are tightening their belts.
In the aforementioned earnings call, Taiwan Semi’s executives warned that demand for smartphones and PCs will likely remain weak all year. Given that the latter represents a key category for myriad chipmakers, the industry may be facing a reality check: TSM might not be the only enterprise to downgrade expectations.
Other tech players that slipped on the Taiwan Semi disclosure include Intel (NASDAQ:INTC) and Texas Instruments (NASDAQ:TXN), which fell 2% and more than 1%, respectively.
To be fair, analysts expect TSM stock to eventually gain from rising demand for AI-centric semiconductors, states Barron’s. However, the AI market is still too small to offset the weaker demand for smartphones and PCs, the bread and butter of the semiconductor industry.
Clouding the sector even more, is the Federal Reserve. Although recent economic data shows that inflation is fading, it might not be enough to convince the Fed not to raise the benchmark interest rate. If so, the higher borrowing costs could lead to more layoffs, which wouldn’t serve the semiconductor industry’s best interests.
Why It Matters
At the moment, analysts within the past three months peg TSM stock as a consensus strong buy. This assessment breaks down as four “buys,” one “hold,” and zero “sell” ratings. On average, the experts’ price target lands at $124, implying over 26% upside potential.
On the date of publication, Josh Enomoto 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.
