📈Semiconductors getting weaker?

We know semiconductors are weak and falling with the Nasdaq but are they setting up to come down even more? Since the beginning of 2022 semiconductors have dropped 43% YTD. The sector was holding up relatively well until earnings announcements. The two most prominent earnings misses were NVDA and AMD.

NVDA had net income for the second quarter of just $656 million, way down from the $2.37 billion profit it recorded a year earlier. Earnings before certain costs such as stock compensation came to 51 cents per share, with revenue rising to $6.7 billion, up from $6.51 billion a year earlier. The results were far below Wall Street’s expectations, with analysts modeling earnings of $1.26 per share on sales of $8.10 billion. Since the earnings announcement NVDA is down 33.24%

AMD issued earnings results Thursday night that are well below its initial guidance.The semiconductor company reported preliminary quarterly revenue of approximately $5.6 billion. It had initially said it expected $6.7 billion in revenue for the quarter, plus or minus $200 million. AMD also said that its non-GAAP gross margin is expected to come in around 50%, while it had previously expected gross margin to be closer to 54%.Shares dropped 21% on Friday. AMD said the shortfall was a combination of a “weaker than expected PC market and significant inventory correction actions across the PC supply chain.”

Semiconductor companies are all intertwined. ASML makes lithography. This is necessary to produce chips. AMAT LRCX are examples of semiconductor equipment manufacturers. TSM GFS are foundries which is where the chips are made. None of these companies will be able to sustain earnings if the cutting edge companies are slashing revenue and earnings. They will cut their cap expenditure budget. Case in point, Micron stated they are reducing capital spending in fiscal 2023 by about $8 billion, or by more that 30%, with a 50% cut in spending on wafer-fab equipment. We could be setting up for a larger drop in semiconductors. If it’s all connected then other companies are going to have to cut earnings. If this is the case let’s look at a historical account of earnings revisions. As you can see below earnings revisions have just started. If we are going to have a recession we could expect a drop similar to 2001-2006 time frame. If that is the case the sector can drop further. (chart by Yardeni data by Refinitv.)

Watch the video below where I focus on how to Short AMD and NVDA.

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