Is it Time to Take Profits in Chip Stocks?

Key Points

• UBS expects weak IT spending to impact the chip market. 
• Sales are already down compared to last year; a decline in outlook could send them moving lower. 
• Leaders like NVIDIA Corporation and On Semiconductor Corporation have the most to lose — analyst sentiment may have already peaked. 

Most chip stocks are up off their lows and have trended higher, like NVIDIA Corporation NASDAQ: NVDA and On Semiconductor Corporation NASDAQ: ON. The first quarter season should be solid amid a market downturn, but the guidance may not be enough to keep the market moving higher. A new report from UBS suggests that weakening IT spending will impact guidance. According to them, a “number of data” points suggest incremental pressure on spending that could impact the enterprise market. In their view, there is a risk of weak guidance, and they expect quarterly results to be soft. 

On the contrary, semiconductor equipment makers should have better quarters and issue more favorable guidance due to demand from China. UBS says China is at an inflation point regarding equipment demand and could easily make up the $8 billion in lost revenue associated with Biden administration export controls. KLA Corporation NASDAQ: KLAC is well positioned, although upside potential may also be limited.

NVIDIA Corporation: Is the Melt-Up Over? 

NVIDIA has been leading the semiconductor market higher on a melt-up that may be reaching its zenith. The move is driven by rapidly improving analysts' sentiment, with the stock at the top of the "most upgraded stocks" list and poised to retest all-time highs. The caveat is that after 45 positive commentaries in 90 days, the Marketbeat.com consensus rating is still only a "moderate buy" with a price target that assumes the stock is fairly valued at current levels. The consensus price target is trending higher, and many of the most recent are above consensus, but even they have the stock capped at the all-time high or just above. That’s good for a gain of 25%, but it may not come if the results and guidance are not inspirational. 

NVIDIA reports toward the end of May and is expected to post a sequential increase in revenue and earnings. The risk is that revenue will fall more than expected and margins will shrink more than expected in the face of flagging demand. The key takeaway from NVIDIA’s fourth-quarter report and others in the industry is that next-gen and AI were underpinning the business. If IT spending plans are cut, the outlook for next-gen and AI is getting cut because consumer-oriented demand is already low. NVIDIA is poised to take a stab at the all-time high, but it needs to get above resistance at the 2022 high before it can. 

On Semiconductor Corporation Might Peak 

On Semiconductor Corporation NASDAQ: SEMI is another leader in the semiconductor industry at risk of peaking. The stock has been trending higher on a tide of positive analysts' commentary that peaked over the last month. The sentiment is pegged at "moderate buy" and the price target is up solidly compared to last year, but there has been no movement in over a month. The company is expected to report in early May and may reinvigorate the analysts, but it will have to produce better-than-expected results and guidance. As it is, the company is expected to post sequential and year-over-year (YoY) declines in revenue and earnings. In this scenario, better-than-expected results may not be enough to produce growth and get the stock to a new high. 

The Semiconductor Index Reversal: Dead in the Water?

The semiconductor index has been bottoming for the last year and is on the brink of a reversal. The next major hurdle is $440, which could be a strong resistance point. It is the bottom of last year’s head and shoulders reversal, and a point of support/resistance tested several times before. If the market can’t get above this level with first-quarter results and guidance, it will be range-bound at this level with a chance of moving lower.