Wednesday's weakness in computer chip makers could be an overreaction, says one semiconductor expert. 

Semiconductor stocks fell after Goldman Sachs analysts downgraded several of them. Micron (MU) fell more than 4% . Broadcom  (AVGO)  fell 1.14%. Qualcomm (QCOM)  fell 1%. Nvidia (NVDA)  lost 1.7%. 

"The severe decline of the downturn will be more modest than in the past," Lisa Chai, Senior Research Analyst at Robo Global index provider told TheStreet. In fact, the semi's selloff could be overdone, and ripe for dip buying. "Maybe this is a good time to come back and add to their [investors'] positions," Chai said. 

Goldman Sachs' downgrades are predicated on oversupply, which could put pressure on chip prices. "For DRAM we now expect slight oversupply in 2019 (driven by first half 2019), and for NAND we continue to expect oversupply in 2018 and 2019 but to a greater extent than our prior view," the Goldman note said. The bank is now forecasting a deceleration in demand for 2019, with chip demand expected to rise 18% year-over-year in 2019, down from 2018's 20.2% rise in demand. "This implies 0.2% oversupply for 2019 in total," Goldman said.  This is putting pressure on the chipmakers' margins, which Goldman says will contract over the next few quarters across the entire industry.

And while the price decreases are somewhat cyclical, and characteristic for the semiconductor industry, it may have been Goldman's surprise revision that did semi stocks in Wednesday. "Whenever Goldman does anything, it does make an impact," Chai said. 

Morgan Stanley analysts agree with Goldman Sachs, writing in a note out Wednesday morning, "We continue to see Tech as a near-term underperformer with the greatest risk in semiconductors." 

Certainly, some would say chip stocks have been due for retrenchment, as many of them have lofty expectations. Broadcom's price-to-earnings ratio is 89, with Nvidia's standing at 40. Micron is a different story, priced at just 4.2 times trailing 12-month earnings.

Any longer-term investors should look at "all the strong technology drivers that will help the industry long-term," Chai said. "You've got Robotics, AI and other new end markets like auto and IOT and 5G, are driving impressive volume and asp increases over the long term," she added. This cyclical period of oversupply and price decreases, that seems to have caught investors flat-footed this time around, is a "digestive" period, in Chai's words, and one that investors should put into perspective. "You've got these big drivers that are still relatively at early stages of cycle regardless of this inventory digestion period that we're seeing." 

In addition, "all of these end-markets driving demand, that's not going to end any time soon," Chai said. "A lot of the semiconductor companies had excess inventory because the demand was so strong," she added. 

Start, and end, your trading day right with TheStreet's 'Daily Snapshot' on your favorite smart-speaker. Learn more about TheStreet's market coverage for your trusted smart-speaker here.

Nvidia is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells NVDA? Learn more now.
 
To be a profitable investor and build long-term wealth, you need the right information and techniques. Join TheStreet Oct. 13, 2018, for a special investing event for sophisticated and active traders. Register for "Invest Like the Pros: Jim Cramer's Boot Camp for Investors" here.
 
 

More from Markets

Nvidia Shares Tank as Analysts Cut Price Targets

Nvidia Shares Tank as Analysts Cut Price Targets

Oil, Energy Stocks, Recover After Volatile Week

Oil, Energy Stocks, Recover After Volatile Week

Flashback Friday: Nvidia Is the Ultimate Chip and Dip

Flashback Friday: Nvidia Is the Ultimate Chip and Dip

Pfizer Plans Price Hikes for 41 Drugs Next Year

Pfizer Plans Price Hikes for 41 Drugs Next Year

Dow Ends Higher on Dovish Trump Tariff Comments; Nasdaq Falls

Dow Ends Higher on Dovish Trump Tariff Comments; Nasdaq Falls