Key Points
- China's economic struggles will likely hurt semiconductor companies like Monolithic Power Systems, Qualcomm and Texas Instruments.
- Analysts and investors expected a post-Covid economic boom in China, but it hasn't materialized.
- Chip stocks that haven't participated in the AI surge have seen sales and earnings decline.
- 5 stocks we like better than iShares Semiconductor ETF
With the AI bounce waning, will China’s sluggish economy further put the kibosh on near-term growth for semiconductor stocks like Monolithic Power Systems Inc. NASDAQ: MPRW, Qualcomm Inc. NASDAQ: QCOM and Texas Instruments Inc. NASDAQ: TXN?
When China’s economy finally reopened earlier this year after Covid restrictions, long after the rest of the world, analysts and investors thought there would be an economic boom.
Well, as we know, that hasn’t happened. The iShares MSCI China ETF NASDAQ: MCHI, which tracks an index of Chinese equities available to international investors, is down 7.93% year-to-date. Meanwhile, the S&P 500 is up 15.04%, despite its August downturn.
Analysts at U.K. financial giant Barclays recently slashed their growth forecast for China, citing worsening conditions in the housing market. China’s industrial production and retail sales fell below expectations in July, adding to concerns.
A widespread slowdown in China would likely impact many techs, a big chunk of whose revenue is dependent upon the region.
Monolithic Power Systems
This company isn’t as well known as other chip makers, but the Kirkland, Washington company has a market cap north of $23 billion and is a component of the S&P 500.
MPS’ products are designed for the storage and computing, enterprise data, automotive, industrial, communications and consumer markets, with the storage and computing market representing the largest portion of its revenue in 2022.
The company has benefited from the boom in AI spending, but that growth was partially offset by cuts in spending on more traditional computing applications, according to analysts.
In 2022 86% of the company’s revenue was derived from customers in Asia, with the majority of that coming from China.
In its regulatory filings, MPS makes several mentions of risks associated with a slowdown in China, so the company should, in theory, be prepared for this turn of events.
The Monolithic Power Systems chart illustrates the 17.99% decline in the past month. Nonetheless, the stock still boasts a year-to-date return of 36.96%. MarketBeat’s Monolithic Power Systems analyst ratings show a consensus view of “moderate buy,” with a price target of $553.46, an upside of 14.76%.
Qualcomm
The San Diego-based wireless communications specialist appears to also be focused on China risks, although mostly for geopolitical reasons.
In its fiscal third-quarter 10Q filing, Qualcomm repeated this phrase several times: “A significant portion of our business is concentrated in China, and the risks of such concentration are exacerbated by U.S./China trade and national security tensions.”
In the quarterly earnings call, on August 2, Qualcomm chief financial officer Akash Palkhiwala said, “We continue to estimate that calendar '23 handset units will be down at least a high single-digit percentage relative to calendar '22, reflecting the macro environment and a slower recovery in China.”
Qualcomm stock is down 16.70% so far in August. Its main focus is chips for smartphones, so it hasn’t participated in the AI mania in the same way as Nvidia Corp. NASDAQ: NVDA, whose stock has been the chief beneficiary of the surge.
As smartphone sales stagnate, so has Qualcomm stock, which has returned only 1.56% this year, badly lagging performance of the iShares Semiconductor ETF NASDAQ: SOXX, of which it, MPS, and Texas Instruments are all components.
Analysts expect Qualcomm earnings to essentially melt down this year, forecasting a 47% drop to $6.68 per share. Both earnings and revenue declined in the past three quarters.
China’s smartphone sales have been slowing, while U.S. sales are rising only slightly.
Texas Instruments
The Dallas-based company is another chipmaker with a focus on end markets that haven’t participated much in this year’s AI frenzy. Texas Instruments primarily serves markets including automotive, industrial, consumer electronics, and communications.
Those markets haven’t been enough to light up earnings and revenue in the era of AI. The company’s sales and earnings slipped in the past three quarters, as its customers have seen sluggish conditions.
That explains the stock’s paltry year-to-date return of 3.02. Shares are down 8.68% in the past month.
In its 2022 annual report, Texas Instruments said revenue from end customers headquartered in China represented about 25% of its revenue. It specifically cited the risk of geopolitical tensions to its business in China, but a tepid post-Covid economic recovery is putting a damper on demand.
MarketBeat’s Texas Instruments earnings data show the company with a long history of beating top- and bottom-line views, so it wouldn’t be unlikely to see that trend continue, even if sales and earnings continue to crumble. Wall Street expects earnings of $7.39 per share for the full year, a decline of 21%.
Texas Instruments analyst ratings show a consensus view of “hold,” which is consistent with the expectation of a 7% earnings rebound next year. Analysts’ price target is $185.32, an upside of 11.31%.
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