The S&P 500 Semiconductor Index is marching toward a 15-year high after stumbling toward the end of December 2018 as companies work through trade negotiations and weak chip demand and position themselves for growth in the coming years.
The index value is gradually approaching the previous 15-year high close value of 1093.94 on June 6, 2018. The rebound started after the index dropped to 777.02 on Dec. 24, 2018, its lowest since July 10, 2017, when it closed at 773.93.
The semiconductor market is economically sensitive and cyclical, and the global recession scare in the fourth quarter — especially with respect to China and the trade war — impacted the sector, said Arif Karim, senior investment analyst at Ensemble Capital.
"You had lots of big bellwether ecosystem players like Apple, Samsung, Nvidia, Intel and others missing numbers and validating the slowdown. As that anxiety has worn off, the sector has recovered as has the rest of the market more generally," Karim said.
There are several long-term growth opportunities for semiconductors in areas such as autonomous vehicles, cloud data centers, artificial intelligence chips, 5G, wearables and smart home, said Linley Gwennap, president of technology research firm Linley Group. "That may be what the investors are reacting to, not the recent short-term demand fluctuations," Gwennap said.
The trade barriers created by tariffs led to uncertainty in the semiconductor market, and chipmakers had to adjust operations and revenue outlooks, said Jim McGregor, principal analyst at Tirias Research.
The trade tensions between U.S. and China hurt Intel Corp., Qualcomm Inc., Nvidia Corp. and Broadcom Inc. Customers were holding orders back, which affected revenue. But the second half of 2019 could be a recovery period as chipmakers provide incentives for customers to order more parts, especially in areas such as 5G and cloud, McGregor said.
Intel is projecting slight revenue growth in fiscal 2019 on data-center deployments. Qualcomm expects 5G deployments to kick-start its revenue growth in fiscal 2020 after a rough 2019.
"There's a lot going on under the hood with the companies. Companies like Qualcomm are fighting the headwinds of a maturing smartphone market. Nvidia is being deflated by the cooling of the [artificial intelligence] hot air balloons. Meanwhile, Intel has advantages of the cloud, industry 4.0, and a reviving of what was a sick PC market," said Dan Hutcheson, chairman and CEO of VLSI research.
Semiconductor shipments will be rough in 2019 but will recover in calendar 2020, according to VLSI Research. A decline in memory shipments — which is the largest sector in semiconductors — will hurt Samsung Electronics Co. Ltd., Micron Technology Inc. and SK hynix Inc. Memory sales were off well over 20% in the first quarter of 2019 on a year-over-year basis, and nonmemory products saw a mild slowdown in the mid-single digits with visibility for a second-half recovery, Hutcheson said.
Semiconductors is one of the key flashpoints in the trade war between the U.S. and China, alongside emerging areas such as 5G and AI, said analysts at Fitch Ratings in an April 14 research note.
A trade agreement and the lifting of tariffs between the U.S. and China will not likely result in massive revenue spikes for semiconductor companies, but it could normalize the business environment and trade activity, which will go a long way in stabilizing the market. It will especially stabilize mergers and acquisitions, which has been largely shut down because of the trade wars, McGregor said.