It wasn’t the FAANGs this time.
Traders of technology stocks have been focused squarely on one chunk of the sector recently: the semiconductors, and the pain that the group has endured over the past two days.
The Philadelphia Semiconductor Index fell as much as 2.7 percent Friday, its biggest drop since June 25, with 29 of 30 members trading lower. Microchip Technology paced declines after inventory woes and a muddled forecast. The benchmark fell 1.1 percent Thursday after Morgan Stanley warned that growing cyclical risks “could drive a meaningful correction” to the sector.
Microchip slumped as much as 14 percent Friday, which would be its biggest drop since 2000. The company’s fiscal first-quarter earnings report revealed inventory issues with its recent acquisition of Microsemi. Management also said on the conference call that talk of tariffs and a trade war is making customers nervous and causing them to pull back on investments.
“Commentary about tariffs leading to lower business confidence and a reduction in sell through in distribution in China is a new development, with broader negative implications for the group,” Morgan Stanley analyst Craig Hettenbach said in a note to clients. He called it “a very messy first quarter out of the gate with Microsemi.”
Hettenbach has an equal-weight rating on Microchip and is the only one of 20 analysts tracked by Bloomberg who doesn’t recommend buying the shares.
Microchip bulls rushed to the company’s defense, calling the stock’s drop a buying opportunity and saying the inventory issues will be a quick fix. Jefferies analyst Mark Lipacis said the shortfall in the revenue forecast is mostly due to normalization of channel-shipment practices after the Microsemi acquisition, rather than a “cycle-peak inventory correction.”
The chip sector may continue to be volatile next week, with earnings from Nvidia and Applied Materials due on Thursday.
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