3 Chip Companies Have Warned. Is It Time to Sell?
Three chip companies covered by Citi Research analyst Christopher Danely have warned investors of a potential correction in the second or third quarter. But Danely wrote in a client note that it’s too early to sell the stocks.
The three companies issued soft guidance for the current quarter were:
(POWI). According to Danely’s Tuesday note, double ordering was what triggered the soft guidance.
Double ordering is jargon for the phenomenon of businesses putting in requests to buy the same part (chips in this case) more than once. Companies do so because they worry about obtaining enough of a part, and potentially will cancel unneeded orders at a later date.
Chips are required to manufacture many common consumer goods such as gadgets, appliances, and automobiles. But the Covid-19 pandemic has contributed global shortage of chips, after plants shut down early on in the pandemic. A quicker-than-expected rebound in demand for products such as cars has also made semiconductors more scarce. As a result, companies are scrambling to get enough chips.
As companies double order semiconductors, it has the potential to damage the chip businesses in the future—which would likely hurt share prices, too. But Danely wrote that it’s too early to unwind a position in the three names that have warned of double ordering. In the note, he agreed that a correction is coming, but since the companies aren’t observing a drop in bookings or lead times, it’s too early to sell.
“They are just concerned that business is ‘too strong,’” he wrote, adding that chip revenue is only 4% above its previous peak in the third quarter of 2018, which leaves “plenty of room to grow.”
Lead times are important, Danely, wrote, because ahead of a chip-sector stock correction, shortages typically wane first. Then lead times decline, after which point it’s time to “run for the hills.”
Danely doesn’t cover Power Integrations, but he has Buy ratings on Texas Instruments and On Semiconductor. He also has Buy ratings on
(MU), and reiterated his call to own leveraged semiconductor stocks.
In Tuesday afternoon trading, Power Integrations stock was down 3.2% to $77.98, Texas Instruments stock is lower by 1.2% to $176.71, and On Semiconductor stock is down 3% to $36.46. The
PHLX Semiconductor index,
or Sox, is down 3.1%.
Write to Max A. Cherney at firstname.lastname@example.org