Cheap chip stocks attract buyers after a sharp sell-off

CHICAGO (May 10): Some of the cheapest tech stocks — semiconductor makers — have been hardest hit in the latest stage of the market meltdown.

Now, with prices set to rebound at Tuesday’s open, bulls are betting that the chip sector is set to outperform, given that demand for semiconductors is strong enough to withstand any broader economic weakness.

“People are blindly turning away from technology, and so the semis look pretty enticing,” said Margie Patel, senior portfolio manager at Allspring Global Investments. “Valuations reflect concerns about whether there’s a huge semi-correction looming in the next six to 12 months, and we just don’t think there is.”

The Philadelphia Stock Exchange‘s semiconductor index is down 28% in 2022, including a 5.1% drop on Monday that left it at its lowest in more than a year. The Nasdaq 100 index is down 25% in 2022. An index of chip stocks in the S&P 500 has fallen 11% in the past three sessions, the most of any tech-related group.

Lockdowns in China are weighing on industry output, while the Federal Reserve’s aggressive stance on raising interest rates has fueled concerns of an impending economic slowdown or recession.

Still, demand for semi-trailers is holding up, with industry sales steadily increasing. So far this earnings season, about 85% of chip companies have reported earnings above expectations, compared to 73% for the entire S&P 500 tech sector, according to data compiled by Bloomberg. Among the most notable reports, Advanced Micro Devices Inc gave a strong forecast, as did Qualcomm Inc.

Analysts expect chipmakers to post 19% profit growth in 2022, up from 14% expected at the start of the year, according to data compiled by Bloomberg Intelligence. For the S&P 500 as a whole, estimated earnings growth has fallen from 8.8% at the start of the year to 10% currently.

Against this backdrop, recent sales have made chipmakers one of the biggest deals at the moment. Micron Technology, for example, trades at less than 6 times estimated earnings, making it the cheapest member of the Nasdaq 100. Qualcomm has a multiple of less than 11, while NXP Semiconductors, Applied Materials and Lam Research all have multiples close to 12. The semiconductor headline index is trading at 14 times earnings, compared to 21 for the Nasdaq 100.

The tech-heavy Nasdaq 100 has fallen about 10% since the Federal Reserve raised interest rates by half a percentage point last week and Chairman Jerome Powell has signaled that the Fed will continue to increase at this rate, wiping out US$1.5 trillion in market value. Futures on the benchmark were up 1.4% at 6:07 a.m. in New York.

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