JHVEPhoto
The semiconductor sector has had a dreadful 2022, with the Philadelphia Semiconductor Index down nearly 40% from its 52-week high. And while concerns have popped up in every corner of the industry as a result of rising inventories, slowing spending and fears of a global recession, UBS said it is bullish on chips going into 2023, with momentum likely to build in the back half of the year.
Analyst Timothy Arcuri noted that investors’ portfolios are still largely underweight on semiconductor companies, but not as low they had been previously. Among investors, hedge funds have started to become positioned more positively over the past few months, but investors only interested in the long term are still skewed negative.
Breaking it down further, the memory space is “overall quite negative,” Arcuri explained, while positioning on industry heavyweights Intel (NASDAQ:INTC) and Analog Devices (ADI) is “notably bullish” going into next year. Investors are also turning positively on semiconductor capital equipment companies.
However, the firm’s top picks going into next year are sector bellwethers Intel (INTC), its top competitor, Advanced Micro Devices (NASDAQ:AMD) and memory chip leader Micron Technology (NASDAQ:MU). Nvidia (NASDAQ:NVDA), Marvell Technology (MRVL), Broadcom (AVGO), Teradyne (TER), Lam Research (LRCX) and Analog Devices (ADI) are also viewed favorably.
Regarding AMD (AMD), Arcuri said that even though data center growth is likely to slow down next year, the industry is still seeing pockets of strength, including accelerated computer for artificial intelligence and natural language processing. Both of these require more computing power, ultimately benefiting AMD (AMD), and to some extent, Intel (INTC).
It’s likely that PC demand will remain weak in 2023, with Arcuri forecasting sales down 10% on a year-over-year basis. But, component sell-in is already well below this level, which could be a positive if there is any pick up in demand.
For Micron (MU), it’s much of the same, Arcuri explained. Estimates have been cut for the company, in some cases by as much as 95%, as demand for memory products dries up, especially in consumer electronics areas like smartphones. However, it’s likely that inventories are working their way through both the PC and smartphone markets, with customers getting closer to making more purchases.
If that happens, the continued momentum in the sector could last throughout earnings season and through 2023, “as downstream customers start to again normalize their purchasing patterns with consumption inflecting late in the year,” Arcuri added.
Arcuri also noted that other areas of the data center are strong, particularly networking, which should help Broadcom (AVGO) and Marvell (MRVL).
At this point, it’s too early to tell when the semiconductor capital equipment companies will recover, with Arcuri being more cautious than others due to re-shoring.
However, Arcuri noted that wafer fab equipment spending in China has grown more than 10 times since 2016 and the recent U.S. export bans, along with those from Japan and the Netherlands, could wind up driving more spending for the industry as a whole, even if companies like Applied Materials (AMAT), KLA Corp. (KLAC) and Lam Research (LRCX) face some restrictions on where their products are used.
Arcuri added that even though things look bleak now for the semiconductor industry, chip stocks are typically the best performing group in the S&P 500 (SP500) once the ISM bottoms out. Arcuri said there could be an inflection point in several chip stocks earlier than in previous cycles, and highlighted UBS’s recent upgrade of AMD (AMD).
Advanced Micro Devices (AMD) and Nvidia (NVDA) were also recently listed among investment firm Bernstein’s top picks for 2023.
Image and article originally from seekingalpha.com. Read the original article here.