Chip Stocks Under Spotlight: Is Earnings Growth Already Priced In?

Key Takeaways

• Chipmakers confirm negative trends in consumer electronics, industrial, and automotive sectors.
• Companies like NXP and Infineon miss revenue estimates and revise guidance downwards.
• They lowered targets due to weakening demand and exchange rate fluctuations.
• Despite near-term concerns, analysts anticipate growth in 2025, driven by memory and artificial intelligence GPUs.

The set of results from the global chip giants confirm the prevailing messages from the semiconductor industry, i.e. negative trends regarding consumer electronics, the start of a correction in the industrial sector, and a slowdown in the automotive area.

The sentiment for 2024 is neutral, with caution for the first half, but there is a more constructive outlook for the second half of the year. A question arises: have stocks already anticipated all this?

From US Bigs More Shadows Than Lights

Chipmaker NXP Semiconductors reported fourth-quarter 2023 revenue of $3.42 billion, above the consensus estimate of $3.40 billion, and forecast adjusted earnings per share for the quarter ending in March ranged from $2.97 to $3.38, above consensus estimates of $3.15.

But the revenue estimate was $3.13 billion, below consensus expectations of $3.16 billion, due to weakness in the electric vehicle segment and the Chinese electronics market.

Instead, ON Semiconductor recorded results in the fourth quarter of 2023 that were slightly better than expected. On the other hand, it had a guidance for the first quarter of 2024 that was lower than expected. This estimated a turnover of between $1.80 billion and $1.90 billion and a diluted earnings per share of between $0.94 and $1.06.

However, shares of the chipmaker and semiconductor supplier to electric vehicle makers jumped 9.5% on Wall Street after the results even as CEO Hassane El-Khoury warned that 2024 could be “busier.”

Infineon Lowers Targets

To revise the 2024 outlook downwards was also the German company Infineon due to exchange rates and the worsening of the industrial/IoT market. It did so after the first quarter of 2023-2024 ended with profits and revenues declining on an annual basis. Profit amounted to €587 million compared to €728 million the previous year, with an earning per share of €0.44 compared to €0.55 in the previous year.

Turnover contracted to €3.70 billion from €3.95 billion. Analysts had expected a net profit of €637.4 million or €0.49 per share and revenue of €3.83 billion. At a divisional level, automotive turnover was solid, up by 11% year-on-year, and industrial turnover was slightly down by 3%. But the consumer and IoT divisions were weaker than expected, down by 27% and 31%, respectively.

Given these accounts, Infineon has forecast a turnover of €3.6 billion for the second quarter of this year and €16 billion for the full financial year 2024 with a euro/dollar exchange rate at 1.1, compared to a previous estimate of €17 billion.

Forex And IoT Weigh On Outlook

Some of the revision of the revenue outlook is linked to the new hypothesis on the euro/dollar exchange rate and the rest to lower demand and greater destocking in the industrial/IoT market.

In fact, the German company confirmed low double-digit growth for the automotive sector while the industrial sector is now seen declining in the mid to high single digits, and the consumer-IoT is seen declining in the mid to high teens.

Analysts have estimated that the new guidance implies an adjusted EBIT of around €3.7 billion. This is 3% below its estimate and 8% below consensus expectations. In comparison, the revision on the adjusted free cash flow is higher – 18% – for net working capital.

They confirmed the positive opinion and the target price of €48 on the Infineon stock which trades at 12 times the price/earnings multiple, in the low part of the historical range (10-28 times, average 18 times).

Is Earnings Growth Already Priced In?

The question becomes whether valuation multiples are already pricing in expected earnings growth. Feedback from many analysts suggests that investor sentiment is more optimistic for semiconductor year-over-year growth in 2025.

Experts forecast a neutral sentiment for 2024, urging caution in the first half but expressing optimism for the latter half. They noted semiconductor fundamentals, excluding memory and AI GPUs, are weak or neutral, especially in analog and microcontroller sectors.

However, semiconductor stocks trade based on fundamentals expected at least six months in advance. Therefore, mid-year investors may discount industry outlook and company fundamental prospects for 2025.

All things considered, 2024 should be an interesting year and will likely reflect a return to growth. Consensus estimates for most semiconductor companies reflect revenue growth.

Good Chances In Long Term

It appears, however, that stocks have already anticipated a good portion of this, as the Sox’s forward P/E multiple has risen in recent weeks/months. This happened even as earnings estimates have started to receive upward revisions. With semiconductor P/E valuation multiples in the mid-to-high 20s and a premium to the S&P 500 multiple, easy money may already be being made in the sector in the near term.

But, over the long term, the return potential for semiconductors is better than for most technology, media, and telecom industries.

Semiconductors help asset managers having more opportunities to generate alpha in any year than all other technology subcategories. Semiconductors have high liquidity and trading volume compared to most internet and software stocks. But they can also have very high volatility and sharp movements both up and down.

While not suitable for all portfolios, overweighting the chip sector could yield strong returns for a diversified equity portfolio, given its 67% return in 2023.