Samsung Lifts Chip Stocks On Cloud-Driven Demand 

Samsung (OTC: SSNLF) reported a mixed quarter but details within the report are lifting the chip sector. While the news may have sparked a near-term bottom we’re not sure it will stick. The company reported a stronger-than-expected demand for memory chips which is good news but the demand was limited to cloud and server applications. Elsewhere in the report, the company stated weaker-than-expected demand for smartphones which we view as a leading indicator for the tech sector. A slowdown in smartphone sales will have a rippling effect that will lead to weakness from component manufacturers to wireless carriers and every industry in between. 

Micron Issues Weak Guidance, It Won’t Be The Last 

Micron (NASDAQ: MU) is another recent report from the chip sector that we think is relevant to this issue. The company produced a mixed quarter that was underpinned by cloud-based server demand and offset by weakness in all other areas. The report was compounded by a reduction in guidance that we see echoed across the chip-space as the reporting period wears on. 

“Recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth in fiscal 2023,” said Micron Technology President and CEO Sanjay Mehrotra although he is still optimistic. “We are confident about the long-term secular demand for memory and storage and are well-positioned to deliver strong cross-cycle financial performance.”

Among the areas of weakness is the video game industry which just posted the slowest month of sales since before the pandemic started. The decline was driven by a lack of new releases but that is not the only story. This is the first decline in software sales in years and the sale of consoles, a leading indicator for this industry, accelerated its decline to 11% YOY. The rise of inflation and rapid increase in interest rates is cutting into consumer spending and video games are an expensive and easy item to cut from budgets. The entire industry is expected to contract by low single-digits now and that figure will likely increase. 

The Analyst's Estimates Are Falling 

The analysts still see upside in names like Micron, Nvidia (NASDAQ: NVDA), Intel (NASDAQ: INTC), and even chip services like Applied Materials but their sentient is in decline. Three of these stocks are listed in the top 21 most downgraded stocks over the last 90 days and they all have waning sentiment and a downtrending price target. Our take on the chatter is that Micron at least, might be at or near the bottom but there is at least one more shoe to drop in the form of slowing data center demand. In our view, the trend in sentiment will continue to spiral downward as demand for consumer-related chips continues to wane. Inflation is still with us and interest rates are about to move higher. 

The Technical Outlook: The Semiconductor Index Is At A Botto 

The semiconductor index (NYSEARCA: SOXX) is at a bottom but we’re not confident of a major rebound. The price action is still well below resistance at the 30-day moving average which may provide stiff resistance. Resistance is likely between 2750 and 3000 regardless of the moving average and it may result in a sideways movement over the next few months.