Semiconductor Stocks: Risk-Reward Profile

Investing.com reports that the risk-reward profile for semiconductor stocks, especially AI-chip producers, has become “unattractive” despite ongoing sales growth, according to BCA Research strategists. They caution that the recent sell-off in chip stocks may not have concluded.

Short-Term Outlook

A recent report indicates that significant gains in the semiconductor sector, particularly for AI chip companies, may have plateaued in the near term.

• BCA strategists stated, “Given their spectacular run-up, share prices of high-end and AI-chip producers might continue selling off even if their sales continue to grow rapidly.”
• They believe the risk-reward profile of semiconductor equities is unattractive for absolute-return investors.

Risks and Challenges

• Korean semiconductor firms may face pressure from potential U.S. restrictions on high-end chip sales to China, which poses a significant risk as China accounts for 36% of Korea’s semiconductor exports.
• TSMC, the largest chip manufacturer, is also vulnerable to broader market weakness amid the ongoing selloff in semiconductor stocks.

Economic Outlook

Growing concerns about the global and U.S. economic outlook might lead investors to lower profit growth expectations for global semiconductor companies, extending the current selloff.

Performance Disparity

• There is a stark disparity between AI chip producers experiencing surging demand and legacy chip producers struggling to recover.
• Despite legacy chips’ challenges, overall share prices for many global semiconductor producers have increased over the past two years, even for those with weaker fundamentals.
• The report notes that some chipmakers with stagnant revenues have still seen their stock prices rise, albeit to a lesser extent.

Strategists foresee a continued lackluster outlook for legacy and non-AI chips over the next six to nine months, despite potential catalysts from new AI-enabled consumer electronics and industrial machinery.

Market Segments

BCA acknowledges differing vulnerabilities within the semiconductor market:
– They maintain a positive outlook on Korean tech stocks due to less inflated valuations compared to peers.
– Conversely, they hold a neutral stance on TSMC and the Taiwanese market overall.

In summary, BCA Research emphasizes that while demand for AI chips remains robust, broader economic challenges could keep semiconductor equities under pressure in the near term.