Is the bloodletting that has pervaded the semiconductor sector finally coming to an end?
Chip stocks got a modest but long-awaited lift Wednesday after Goldman Sachs upgraded several semiconductor companies, including
Although Goldman's note suggested that the chip sector's two-month slide may be near the bottom, many investors continue to view the sector with apprehension -- particularly in light of the broader market's tumultuous state.
"I think the trading environment isn't lending itself very well to any tech shares right now," says Michael Church, an analyst at Church Capital Management. "So, to me it seems prudent to play wait-and-see instead of trying to catch the falling knife. Let them prove themselves."
Chip stocks have been hammered by a combination of industry-specific issues and general macroeconomic trends, including rising prices for energy and commodities, as well as the potential for interest rate hikes.
Investors are also worried about the specter of increasing levels of chip inventories throughout the distribution channel and slowing demand for personal computers in the U.S. and Western Europe.
Then, of course, there's the stock-option backdating controversy, which appears to have had a disproportionate impact on chip companies when compared with other industries.
Because many of these concerns continue to linger, few investors are ready to declare that chip stocks are out of the woods.
sales aren't going, basically everything is going to slow down," says Pat Adams, chief investment officer of Choice Investment Management. "People are hanging their hats on cell phones carrying us, and I just don't think that's possible."
And with the
looking likely to continue raising interest rates to contain inflation, says Adams, the chip sector, along with the overall economy, could see a lot more downside in the coming months.
"We're going to see the worst part of it here in the next six months," projects Adams, although he expects that chip stocks will get a minor bounce in the near term as valuations become too good to pass up.
The Philadelphia Stock Exchange Semiconductor Sector index is down 17% since early May. The list of stocks that have joined the 52-week-low club in the past month includes
Maxim Integrated Products
. Intel shares have recently hit three-year lows.
Bargain prices are enticing some investors to come forward, albeit on a limited, case-by-case basis. Seligman Technology Group's Sangeeth Peruri says he has recently been "nibbling" on shares of Maxim, as well as on
(down 42% since mid-April) and
(down 22% since mid-April).
"The numbers are safe there. I feel like valuations seem very compelling," says Peruri.
But he says he's not about to make a call on the semiconductor sector as a whole, particularly with no near-term catalysts, such as earnings reports, on the horizon.
To be sure, Goldman didn't go so far as to say it's bullish on the semiconductor sector, only that its view of most chip stocks it covers has become "less negative."
The firm upgraded its ratings on
Advanced Micro Devices
to in line from underperform, and said that it remains concerned about a possible inventory correction.
The news did bump up shares of the chosen few. Ending the regular session Wednesday, Intel gained 3.6% to $17.73; AMD rose 3% to $25.11; SanDisk jumped 3.2% to $51.50; and Applied Materials rose 1.9% to $16.44.
The only chip stocks Goldman recommends buying at this point are Marvell, Intel and
. (Goldman Sachs has recently received or expects to receive compensation for investment banking services from AMD, Applied Materials, FormFactor, Intel and SanDisk, and the firm makes a market in securities of Applied Materials, FormFactor, Intel and SanDisk.)
Upgrade on a Miss
According to the Goldman analyst James Covello, Intel is likely to miss its second-quarter financial targets and to guide third-quarter results below Wall Street expectations, which is why he is upgrading the stock.
Covello says Intel is exhibiting all the key signs that it has reached the bottom of a cycle and is due for a rebound. Margins will soon come close to the 47% level reached during Intel's last downturn in 2002, wrote Covello, adding that the company will likely write off inventory and move forward with restructuring actions in the coming months.
And while the market for PC microprocessors is challenging, Covello believes that Intel's
forthcoming new line of Core microprocessors will allow Intel to recapture share in every product category except high-end servers.
Covello says the 17x multiple on Intel's full-cycle normalized EPS is in line with the market multiple and well below the 23x price-to-earnings ratio for the rest of the semiconductors covered by Goldman.
"We believe that a company with Intel's market share, long-term growth rate, balance sheet and brand value should trade at a premium to the market multiple on normalized earnings, thus providing valuation upside to the stock," wrote Covello.
Analyst Michael Church, whose firm already owns Intel shares, says he is not in any hurry to add to the position.
Intel's valuation has become attractive, particularly for a company that is the dominant player in a market, says Church. But the recent price war that the company is engaged in with AMD does not bode well.
"I just don't see how anyone wins besides their customers at this point," he says.