Chip stocks are falling in Friday trading after Broadcom Inc. gave a gloomy forecast, suggesting more pain could be in store for the semiconductor industry.
For months, chipmakers had been teasing a second-half recovery, but Broadcom’s AVGO, -6.64% commentary indicated that orders have been contracting, reflecting not only the government ban on shipments to Huawei Technologies Co. but also general macroeconomic uncertainty.
”We expect Broadcom’s report to be a preview of what we’re likely to hear from other semi suppliers during July earnings,” wrote Raymond James analyst Chris Caso in a note titled “Weakness Well Beyond Huawei.”
Caso, who rates the stock at market perform, gave the caveat that Broadcom’s disclosures may include “some degree of catch-up” given that the company didn’t lower its numbers last quarter the way some other chipmakers did.
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Broadcom shares are down 7% in Friday trading, dragging down peers as well. Shares of Micron Technology Inc. MU, -1.86% , Texas Instruments Inc. TXN, -3.16% , Skyworks Solutions Inc. SWKS, -3.08% Nvidia Corp. NVDA, -3.03% Advanced Micro Devices Inc. AMD, -3.55% Qualcomm Inc. QCOM, -1.83% Western Digital Corp. WDC, -2.01% and Intel Corp. INTC, -1.47% are all off in the session.
The PHLX Semiconductor Index SOX, -2.75% is down 3.1%, with 29 of 30 components trading lower.
Susquehanna Financial Group analyst Chris Rolland estimates that Huawei accounts for about $400 million of the $2 billion shortfall that Broadcom Chief Executive Hock Tan told investors to expect during the company’s earnings call, while mentioning inventory reductions by some of its customers.
“We view this commentary as particularly worrisome as we had thought most [original equipment manufacturers] were already well into the process of inventory reductions at this point in the semi downcycle,” wrote Rolland, who has a positive rating on the stock but lowered his target to $315 from $320. “This perhaps suggests that either another shoe may drop for semis given the latest bout of macro/tariff/Huawei announcements or this may just be a Broadcom-specific customer inventory issue.”
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SunTrust Robinson Humphrey analyst William Stein said that Broadcom’s report contained a “sobering demand update” that, in the eyes of management, “makes modeling a second-half recovery unreasonable.” He wrote that fellow chip stocks with the most downside risk include Intel and Nvidia.
Stein rates Broadcom’s stock a buy, lowering his target price to $307 from $339.
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Bernstein’s Stacy Rasgon said it was “probably best” that the company went ahead and reset expectations, though Broadcom’s new outlook came in lower than he had previously expected.
“That said, while management stated on the sell-side call that they tried to cut to the point where they would feel very comfortable making their numbers, given the general uncertainty (and Hock’s tone on the public call) it may be difficult for investors to really gain that comfort, and we suspect the shares may be range-bound for a bit until we get some further visibility,” wrote Rasgon, who rates the shares at outperform with a $300 target. “In particular, it is becoming increasingly clear that geopolitics is now having a real impact on the macro and demand environment.”
Of the 36 analysts tracked by FactSet who cover Broadcom’s stock, 25 have buy ratings and 11 have hold ratings. The average price target is $308.26, 18% above current levels. Sixteen analysts cut their targets following the latest report, according to FactSet.
Broadcom shares are up 3.2% so far this year, as the S&P 500 SPX, -0.35% has risen 15% and the PHLX Semiconductor Index has climbed 17%.
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