Chip stocks have failed to power up this year as they have been embroiled in the strained relationship between the U.S. and China. Major chip stocks including Nvidia (NVDA), Lam Research (LRCX), and Micron Technology (MU) have declined by more than 40% in value this year while AMD (AMD) has more than halved in value.
In contrast, Monolithic Power Systems (MPWR) have seen around a 30% decline this year.
Will chip stocks continue on a downward trajectory heading into 2023? Let’s take a look at the different factors currently impacting the semiconductor industry.
Back in October, the U.S. Government brought in new rules that prohibited certain U.S. companies from working with Chinese chipmakers. The U.S. Government had also raised concerns about certain chip technologies falling into the hands of the Chinese military.
U.S. chip companies were also banned from selling chips designed for use in artificial intelligence (AI), data centers and supercomputers unless they secured an export license. With the new rules in place, Lam Research stated that it expected to take a hit in the range of $2 billion to $2.5 billion in annual revenues.
In addition, earlier this year, the U.S. Government also brought in the CHIPS Act to support local manufacturing of chips through $52 billion in terms of incentives, loans and grants.
There have been reports that to counter these measures from the U.S., China is contemplating a package of $143 billion to support its semiconductor industry.
Amid this tussle between the U.S. and China and even with the incentives in place, as Micron’s management pointed out at its fiscal Q1 earnings call recently, “The industry is experiencing the most severe imbalance between supply and demand in both DRAM and NAND in the last 13 years.”
However, most chip companies expect the demand and supply situation to improve in the second half of next year.
As Goldman Sachs top-rated analyst Toshiya Hari commented after MU’s disappointing Q2 forecast, “While we maintain our Buy rating on MU on favorable risk-reward, we acknowledge that Micron, along with its industry peers, will need to demonstrate sustained and consistent supply-side discipline for pricing to improve in 2HCY23 and for investors to once again believe that memory industry margins and FCF [free cash flows] can grow on a through-cycle basis.”
The overall downslide among chip stocks has also resulted in the VanEck Semiconductor ETF (SMH) falling by more than 35% this year.
Conclusion
Overall, chip companies seem to be battling on multiple fronts this year. This includes the demand and supply gap, the repercussions of the volatile retaions between the U.S. and China and in some cases, its customers’ excess inventory.
It remains to be seen whether the chip industry can surmount some of these problems through fiscal discipline.
