Once-hot semi stocks just took a huge hit, and some see more pain

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Semiconductor stocks like Nvidia, Applied Materials and Micron were synonymous with stellar gains last year amid strong demand and the cryptocurrency frenzy. Lately, it seems like the tide has turned for the once-high-flying names, and some market watchers are forecasting further downside.

The entire space was slammed on Thursday, posting its largest single-day drop since December 2016. The SMH, an ETF tracking semiconductors, fell 4.5 percent as its top holdings got crushed. This action comes amid a broader concern around the technology sector’s valuation.

Mark Tepper, president and CEO at Strategic Wealth Partners, gives the group an underweight position. After the huge run-up for chipmakers, he found the valuation unattractive.

“We definitely feel it’s time to dump the chip names that are heavily dependent on the high-end smart phones, especially with Taiwan [Semiconductor], when 21 percent of your revenue comes from one source, being Apple,” Tepper said Thursday on CNBC’s “Trading Nation.”

“The global M&A frenzy from last year, along with all the bitcoin hype, really pushed these stocks into the stratosphere, to the point [of] five-year earnings growth forecasts of 25 percent. That’s just a really tough hurdle to overcome,” he said, citing less demand for Apple’s iPhone, which would theoretically threaten semi stocks’ performance.

“You can see that with Apple, their strategy has changed to include a more balanced mix of revenue, where they’re getting more from services, so I think there’s obviously … a changing landscape,” he said.

Others are less negative, though still cautious. Gina Sanchez, CEO of Chantico Global, said that while there’s slowed growth in the space, Thursday’s decline was likely a one-off event.

“Clearly, we’re probably slowing, but there still is significant demand there,” she said. “Part of what’s driving [Thursday’s move lower] really has to do with an inventory drawdown, which is Apple’s decision to pull all the inventory” from one type of Taiwan Semiconductor chip to prepare to use a different chip.

“That has nothing to do with the demand; that was basically over-ordering. They’re now drawing down that inventory and getting ready for another cycle,” Sanchez said, adding that while some of the meteoric semiconductor rise was over-hyped, demand related to artificial intelligence will still likely remain.



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