Here Are Citi's Picks To Ride Out The Storm As Chip Stocks Hit New Lows

Despite the fact that semiconductor stocks have generally recovered this year, Citi cautions that if businesses cut guidance, they may soon reach new lows.

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The PHLX Semiconductor Sector indicator (ticker: SOXX), which has risen around 20% year to date, is expected to decline, according to the bank's experts.

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We anticipate a 30% collapse in the SOX index to occur, with new lows being reached, according to analyst Christopher Danely in a note dated February 27.

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He saw that there had been a sharp fall in sales in both the commercial end market and the end market for data centers.

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He said that: "Intel directed its datacenter company down high-teens QoQ, while AMD directed its data center company down at least 10% QoQ. Sales from the industrial end of the market for TXN, NXPI, ON, and QCOM all decreased double-digits QoQ in 4Q22 and are likely to decline sequentially in 1Q23."

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According to Danely, chipmakers' expected earnings per share have decreased 32% this year. We think the industrial, car, and data center end industries will correct, causing the consensus estimates to drop by at least 10%.

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The analyst stated that Analog Devices maintains its top choice in this scenario due to its "conservative stance," calling it the "most defensive name."

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He pointed out that the consensus EPS projections for Analog Devices and Microchip Technology, respectively, had increased by 5% and 7%, which is significantly more than the 15% median fall.

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"We expect semiconductor equities will bottom once every business - including ADI and MCHP - cuts estimates, trades at or below trough valuations, and reduces expenditure," Danely continued in the future.

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Upside-potential stocks?

Also, Citi listed a few semiconductor companies to take into account after the tough times pass.

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"After the slump is over, we prefer to purchase equities with secularly expanding EPS, such as Micron, ON, GlobalFoundries, and AMD as they should provide the biggest upside," Danely added.

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The bank has given Analog Devices, Micron, ON Semi, and GlobalFoundries buy ratings.

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The prospective increase in the share price of Micron from Citi is the largest, at 32%. The bank estimates that the upside potential for Analog Devices, ON Semi, and GlobalFoundries is each about 22%.

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Citi rates AMD as neutral and predicts a 1% decline in the company's stock price.