Chip stocks could plunge another 25% as ‘we are entering the worst semiconductor downturn in a decade,’ analyst says

Danley did not see the same positives, however, saying he believes that the strong sectors showed signs of future weakness.

“We also witnessed the first signs of a correction in the automotive and industrial end markets and we continue to believe we are entering the worst semiconductor downturn in a decade given the recession and inventory build,” Danley said, citing cancellations of orders from auto and industrial companies that executives from Micron Technology Inc. MU, -0.61% and Analog Devices Inc. ADI, -1.27% disclosed in recent weeks.

Read: Dell sees PC sales decline worse than estimates, stock logs second worst day since return to Wall Street

“We expect more companies to announce cancellations from the auto/industrial end markets as capacity is added and demand weakens,” Danley said.

Companies that specialize in making auto and industrial chips have fared better — their stocks haven’t declined as much — across the board this year given that chip demand has persisted in these industries whose supply chains were hit the hardest by the COVID-19 pandemic. Danley expects they will, creating another leg down for chip stocks.

“We maintain our belief that every company/end market will correct and we expect the SOX index to hit new lows and fall another 25%,” Danley said.

Danley’s referring to the PHLX Semiconductor Index SOX, -1.80%, which is already on track to post its worst decline in 14 years. For the year, the index is down 32%, and if unchanged, would be the worst decline in the index since 2008 when it dropped 48% over the year.

Another 25% drop from its current level of about 2,700 would put the SOX at around 2,020, a low not seen since July 7, 2020, when it closed at 2,019. If the SOX closed the year at 2,020, it would also give the SOX its worst year ever with a 49% drop, worse than 2008’s 48% drop, currently the worst on record. The SOX last closed at a record high on Dec. 27, when it finished at 4,039.51, according to FactSet data.

Semiconductor designers focused on the auto and industrial sectors include Texas Instruments Inc.  TXN, -1.22%,  which has a big presence in auto chip sales and recently reported an outlook that topped Wall Street estimates at the time, as well as Analog Devices and ON Semiconductor Corp.  ON, -1.93%  Outside the U.S., big auto suppliers include Netherlands-based NXP Semiconductors NV  NXPI, -1.44%,  Japan’s Renesas Electronics Corp.  6723, +0.08%  and Murata Manufacturing Co.  6981, -0.11%,  and Germany’s Infineon Technologies AG IFX, -1.27%

The most battered SOX stocks on the year include Nvidia Corp. NVDA, -2.76%, which is down 48% for the year, and Marvell Technology Inc. MRVL, -2.83%, down 45%. Among major chip makers, Advanced Micro Devices Inc. AMD, -3.53% probably got off the lightest with just a slightly substandard forecast while Intel Corp.’s INTC, -1.38% report was a mess.

For more on this year’s stock moves: Chip stocks tanked as pandemic demand for electronics slumped, but there are still some winners

Danley’s top pick among chip companies is Analog Devices, and he wrote Tuesday that his favorite stocks to own coming out of the downturn are Micron, AMD, ON Semiconductor Corp. ON, -1.93%, and GlobalFoundries Inc. GFS, -2.88%. Two of Danley’s favorite stocks fall squarely into the auto and industrial category: Analog Devices and ON Semi.

On Tuesday, the SOX index was down as much as 2.4% and at last check was near those session lows. In comparison, the S&P 500 index SPX, -0.32% was off 1.4%, and the tech-heavy Nasdaq Composite Index COMP, -0.35% was down 1.8%.

From July: Are chip stocks set up for a short squeeze, or just more declines? Wall Street doesn’t seem sure