A version of this story originally appeared in CNN Business’ Bell the Bell newsletter. Not a subscriber? You can register here.
Semiconductors are in everything. Our phones, laptops, TVs. Even our cars. But worries about a global recession and persistent supply shortages stemming from pandemic-related shutdowns in Asia over the past two years have hurt top chip companies.
Intel ( INTC ) shares are down more than 45% this year, making it the Dow’s biggest dog. Intel ( INTC ) is struggling despite well-publicized plans to build more plants in the U.S. and hire more at home. President Biden even just toured the new Intel ( INTC ) facility in Ohio for a groundbreaking ceremony.
To be fair, Intel isn’t the only chip company having a hard time this year.
Shares of semiconductor rivals Nvidia ( NVDA ) and AMD ( AMD ) both fell more than 50%. Supply chain challenges and fears about a rapidly slowing economy are weighing on the entire sector. The benchmark Philadelphia Semiconductor Index (SOX), or SOX as it’s known on Wall Street, is down about 40% in 2022.
But Intel stayed behind longer. Shares are trading at their lowest level since May 2016. Over the past five years, the stock is down more than 25%, SOX has more than doubled, Nvidia is up nearly 200%, and AMD is up more than 400%.
Can new CEO Pat Gelsinger (he takes over in 2021) turn Intel around? Investors can give Gelsinger more time to get the company back on track.
How long, though, is unclear. Gelsinger’s predecessor, Bob Swan, was CEO for just over two years. Swan replaces Brian Krzanich, who resigned in 2018 after disclosing a “past consensual relationship” with an Intel employee.
One fund manager who owns the stock thinks Gelsinger can restore Intel to its former glory. But he said this will take time and investors need not rush into the stock just yet.
“I don’t think there is a rush to buy. But in the longer term, I think Intel will right the ship,” said Jeff Travis, portfolio manager at Oak Associates Funds. Travis owns Intel in the Red Oak Technology Select fund.
Travis thinks that semiconductor stocks are still a good “secular growth industry” and that valuations are now attractive given how sharply shares have fallen.
He said chip equipment companies KLA and Kulicke and Soffa ( KLIC ), which sell products to major semiconductor makers, and Ambarella ( AMBA ), whose video processing chips are used in cars, are top picks.
Is the worst over for these and other semiconductor companies? Goldman Sachs analysts don’t think so. Memory chip leaders Micron ( MU ) and Western Digital ( WDC ) , which will report earnings on Friday, cut revenue and earnings estimates on Friday.
“There are a number of negative industry data points,” analysts said, pointing to cautious comments about demand from Intel, AMD and Nvidia in recent weeks. Goldman analysts added that there was “weakness in the PC, enterprise server and smartphone end markets.”
So it may be too soon for the big chip companies to call a bottom yet.
September is historically the worst month for the stock market. This September is no exception.
The Dow has lost more than 6% so far this month and is not far from its 52-week low. This results in a drop of more than 4% in August. The S&P 500 and Nasdaq fared worse, down 7% and 8%, respectively.
Could the market revive in October? Of course, the month ending in Halloween has a bad reputation for being scary for traders. October saw some historic lows on Wall Street. Consider the years 1929, 1987, and 2008, for example.
But these massive October sales are actually anomalies. Stocks often enjoy strong year-end rallies as investors bet on healthy earnings growth and strong consumer spending during the holidays.
Retail sales have been rising lately, helping to put more money in consumers’ pockets as a result of the big drop in gas and oil prices. So there is hope that Americans will continue to shop, especially since the job market remains strong. This should increase corporate profits.
Still, turmoil in global markets, particularly inflation, is leading blue-chip companies like FedEx ( FDX ) to issue warnings about earnings and the economy.
Most major corporations will report earnings for the third quarter in October… and that means they can also provide updated forecasts for the fourth quarter and provide some first glimpses of what to expect for sales and profits in 2023.
Over the past few weeks, analysts have already significantly reduced their forecasts for the third quarter. Wall Street is now forecasting only 3.2% earnings growth for the third quarter, according to FactSet data.
If they start cutting estimates for later this year and next year, that could push the stock even lower.
“There’s more downside risk to U.S. stocks,” said Luke Tilley, chief economist and head of asset allocation and quantitative services for Wilmington Trust Investment Advisors.
Monday: German GDP
Tuesday: US standing orders; US consumer confidence; US new home sales; Earnings from Jabil ( JBL ), United Natural Foods ( UNFI ), and Blackberry ( BB ).
Wednesday: US pending home sales; Earnings from Cintas (CTAS) and Paychex (PAYX).
Thursday: US GDP (third estimate for Q2); Weekly US Jobless Claims: Porsche IPO; Gains from CarMax ( KMX ), Rite Aid ( RAD ), Bed Bath & Beyond ( BBBY ), Nike ( NKE ), and Micron
Friday: End of third quarter; US PCE inflation; US personal income and expenditure; Consumer sentiment from Michigan, USA; China PMI; Indian interest rate decision; Profit from Evergrande