Outside of AI, chip sector is 'not all that great': Analyst

Fri, Apr 19, 2024, 2:46 PM

Shares of Super Micro Computer (SMCI) fell sharply Friday after the company opted not to pre-announce its first-quarter results. This development comes as the semiconductor sector undergoes a sector-wide correction. Bernstein Managing Director and Senior Analyst Stacy Rasgon joins Market Domination to provide insights into this situation.

Rasgon acknowledges that while the chip sector is undergoing a correction, "outside of AI" the industry has not been performing well. He notes that other segments of the sector, such as automotive, data centers, PCs, and smartphones, "are not all that great," which could be contributing to the sector-wide pressure, in addition to the disappointing earnings from major players.

Rasgon shifts the focus to the question of "the pace of the recovery," noting that the stocks have held up "remarkably" despite the revisions, suggesting this is "a delayed reaction."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video Transcript

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JULIE HYMAN: It's been a tough week for tech, especially in the chip space. And the latest contender today, Super Micro Computer, the server company, under pressure. It's sliding because it didn't preannounce results. It usually does, or at least the market expects it to, and this all coming after the broader semiconductor sector fell into correction this week on shifting expectations for rate cuts and disappointing results from ASML and TSMC.

Now joining us now is Bernstein senior analyst Stacy Rasgon, hopefully to put all of this in perspective for us. Stacy, it's great to see you. As always, there is nearly no one I would rather speak to on semiconductors than you. So we got Nvidia down 9% today.

STACY RASGON: Yeah.

JULIE HYMAN: What the heck is going on?

STACY RASGON: I think with Nvidia, it's probably just Super Micro dragging. Like, it's dragging the whole semi-space down, and like the AI names are getting hit worse. I don't-- Like, they didn't say anything. Like, they didn't report earnings for another month, frankly. I don't think it's more than that. But I mean, you look at the industry as a whole, you're right, things are starting to move more into a correction phase. We had reports from players like ASML and TSMC.

You have to remember, outside of AI, AI is very strong right now. The rest of the semi-industry this year is not all that great, right? PCs and smartphones, like they've probably hit bottom. I don't think they're getting any worse, but like they're not necessarily getting a ton better right now.

Data center spending outside of AI is actually quite weak. Server CPUs and networking, and that sort of thing is quite weak. Industrial end markets have been very weak. Automotive TSMC called this out. Automotive is now starting to roll over potentially. And so I think, just broadly for the industry, especially given how strong it was last year, it was very strong year to date until recently.

Valuations in the sector have been very high as the stocks have held up very well amid estimate cuts. I mean, I guess part of me is not incredibly surprised that things are taking a little bit of a breather as we get ready for earnings, which kicks off like, you know, in a big way next week.

JULIE HYMAN: So Stacy, talk to me about the timeline then for this breather. Where are we at? Are we at the beginning of this cycle, or are we in inning 1? Are we in inning 7?

STACY RASGON: You know, it's funny. So a lot of these companies have actually been cutting numbers for a while. Like, it's not so like-- Like I said, PCs and smartphones, I think were through most of it. The question now is on like the pace of the recovery. But some of the analog like things-- like the industrial and the auto-- like some of these companies like Texas Instruments and some of their peers, have already been cutting numbers for three, four, five quarters in a row. Like, it's not like it's new.

The stocks, like I said, have held up very, very well amid estimate cuts. But the semiconductor investors, in general, like to buy estimate cuts if they believe that the bottom is in. Usually the stocks go down first, though. Like in many cases over the last six months amid some fairly sizable negative revisions, the stocks just haven't gone down. They've held up very, very well.

And so I think if you're asking where are we in terms of like the numbers cuts, hopefully we're closer to a bottom to the end of it than the beginning because we've been going on for a while. For the stocks, though, like I said, the stocks have held in remarkably much better than I think they ordinarily would in a typical cycle. And like I said, maybe we're starting to see a little bit of a delayed reaction, but some of it's happening.

There'll be some bellwethers that report next week. Texas Instruments is kind of the first large, diversified guy that reports there on Tuesday next week. Intel and my coverage reports on Thursday. We'll get a better view on PCs and servers and those kinds of broader markets as well.

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