Risk-reward for chip stocks ‘unattractive’, selloff may continue: BCA

Investing.com — The risk-reward profile for semiconductor stocks, particularly high-end and AI-chip producers, has become “unattractive” despite continued sales growth, BCA Research strategists noted, warning that the recent sell-off in chip stocks may not yet be over.

According to a Wednesday report, the impressive gains in the semiconductor sector, particularly for companies focused on AI chips, may have run their course in the short term.

“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,” strategists said.

“We believe the risk-reward profile of semiconductor equity prices is unattractive for absolute-return investors,” they added.

BCA points out that Korean semiconductor firms could face additional pressure from potential US restrictions on high-end chip sales to China, although China’s large stockpiles may curb future demand regardless.

With China accounting for 36% of Korea’s semiconductor exports, this poses a significant risk. Meanwhile, TSMC, the largest chip manufacturer, remains vulnerable to broader market weakness amid the ongoing selloff in semiconductor stocks.

Overall, growing concerns about the global and US economic outlook “will likely lead investors to downgrade profit growth expectations for global semiconductor companies and extend this current selloff,” BCA’s team highlights.

The firm also notes the stark disparity in performance between AI chip producers and those focusing on legacy and non-AI semiconductors.

AI-related chips have seen surging demand, driving sales growth, while legacy chips have struggled to recover. Despite this divergence, strategists point out that “the majority of global semi producers’ share prices have rallied” over the past two years, even those with weaker fundamentals.

“In fact, the stocks of chipmakers whose revenues have not risen at all have also advanced in the past two years, albeit by a lesser extent,” the report adds.

“Even if the growth in demand for AI chips continues at a brisk pace, the global outlook for legacy and non-AI chips will remain downbeat over the next six-to-nine months.”

Strategists acknowledge that a potential catalyst for an upturn could come from the introduction of new models of consumer electronics and industrial machinery featuring AI capabilities. However, they believe that while such a demand surge is likely in the future, it is not expected to be significant within this six-to-nine-month timeframe.

Still, BCA observes that not all segments of the market are equally vulnerable. It maintains a favorable view on Korean tech stocks, recommending an overweight position in these equities, particularly given their less inflated valuations compared to other semiconductor stocks.

“Korean semiconductor equities have not risen substantially: they are neither overbought nor as expensive as many other semiconductor stocks,” the report notes.

Meanwhile, the firm maintains a neutral position in Taiwan Semiconductor Manufacturing Co. (TSMC) and the Taiwanese market overall.