Is the Semiconductor Sector in Trouble? BCA Research Warns of Unattractive Risk-Reward Profile for Chip Stocks
In a recent report, BCA Research strategists have raised concerns about the risk-reward profile of semiconductor stocks, particularly high-end and AI-chip producers. Despite continued sales growth, they believe that the recent sell-off in chip stocks may not be over yet.
The impressive gains in the semiconductor sector, especially for companies focused on AI chips, may have peaked in the short term, according to the report. The strategists caution that even if sales continue to grow rapidly, share prices of high-end and AI-chip producers might continue to decline.
One of the key factors contributing to the uncertainty in the semiconductor market is the potential US restrictions on high-end chip sales to China. With China being a major market for Korean semiconductor exports, any restrictions could pose a significant risk to Korean firms. Additionally, TSMC, the largest chip manufacturer, remains vulnerable to broader market weakness amid the ongoing selloff in semiconductor stocks.
BCA Research also highlights the performance gap between AI chip producers and those focusing on legacy and non-AI semiconductors. While AI-related chips have seen strong demand and sales growth, legacy chips have struggled to recover. Despite this disparity, the majority of global semiconductor companies have seen their share prices rally over the past two years.
Looking ahead, BCA Research believes that concerns about the global and US economic outlook could lead investors to lower their profit growth expectations for semiconductor companies. They also note that while there may be potential demand for AI chips in the future, the outlook for legacy and non-AI chips remains downbeat in the short to medium term.
In terms of investment recommendations, BCA Research maintains a favorable view on Korean tech stocks due to their less inflated valuations compared to other semiconductor stocks. They recommend an overweight position in Korean equities. However, they maintain a neutral position in Taiwan Semiconductor Manufacturing Co. (TSMC) and the Taiwanese market overall.
In conclusion, investors should be cautious when considering semiconductor stocks, especially high-end and AI-chip producers. The market outlook remains uncertain, and potential risks from US-China tensions could further impact the sector. It is important to carefully evaluate the risk-reward profile of semiconductor investments and consider diversifying portfolios to mitigate potential losses in the current market environment.
