Chip Stock Earnings Estimates Still Look Way Too High, Goldman Analyst Warns

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Chip stocks are gaining ground on Friday following better-than-expected financial results from the contract manufacturer

Taiwan Semiconductor
,
but the sector is far from out of the woods. Earnings estimates remain at risk.

On Friday,

Goldman Sachs

chip analyst Toshiya Hari slashed his calendar 2023 earnings forecasts by an average of 20% for both chip makers and semiconductor equipment stocks to reflect continued deterioration in the macroeconomic environment.

“None of our companies are immune to a slowdown in global GDP, and if anything, we expect the group to remain under pressure until Street estimates are sufficiently de-risked,” Hari said in a research note. Other analysts have been cutting their forecasts, but Hari thinks there is a lot further to go. He noted that on average, his revised 2023 estimates are 22% below the consensus call for chip stocks, and 27% below for equipment makers.

In March, Hari also made a round of broad estimate cuts, but he is now convinced that he didn’t go far enough. Goldman economists have since reduced their forecasts for growth in gross domestic product “as persistent inflation has driven central banks to raise interest rates at a faster pace than previously expected,” he said.

It is now apparent that consumer-facing technology businesses, which had benefited from the work-from-home trend, are now seeing “sharp” sequential declines in revenue, the analyst wrote. Hari said that while chip companies more tied to non-consumer markets such as the cloud, data centers, and industry will likely “guide to a more robust outlook,” it is only a matter of time before those areas likewise show signs of softening demand.

Hari’s cuts to his forecasts for the chip companies were far-reaching. Seeing softer demand in the PC and data center markets, he slashed his estimates for

Intel

(INTC), Advanced Micro Devices (AMD), and

Nvidia

(NVDA). He sharply reduced his outlook as well for industrial and automotive chip players like

Texas Instruments

(TXN), NXP Semiconductor (NXPI) and ON Semiconductor (ON).

He took down his numbers on the smartphone-reliant chip makers

Qorvo

(QRVO) and

Skyworks

(SWKS), on the distributors

Avnet

(AVT) and Arrow (ARW), the disk-drive stocks

Seagate

(STX) and

Western Digital

(WDC), and equipment providers like

Applied Materials

(AMAT), Lam (LRCX) and

KLA

(KLAC).

The cuts were deep as well as broad. For 2023, he lowered his forecasts of per-share earnings by 46% for Intel, 21% for Texas Instruments, 42% for ON Semi, and 43% for both Seagate and Western Digital, for instance.

The analyst suggested chip investors focus on companies overexposed to defensive end markets, or with valuations that offer a favorable balance between risks and potential rewards. His Buy-rated names include Analog Devices (ADI), AMD, Credo Technology Group (CRDO),

Entegris

(ENTG),

Marvell

(MRVL), and Impinj (PI). He maintained Sell ratings on Intel, Texas Instruments, Avnet, and

Cohu

(COHU).

Write to Eric J. Savitz at [email protected]