Citibank pointed out that although there has been a sharp decline in US chip stocks, this is mainly due to macroeconomic factors and high expectations. Semiconductors markets are still bullish, mainly because the demand for AI and storage markets remains strong. It is expected that DRAM prices will increase by 62% YoY in 2024, and Micron's performance guidance may be revised upward.
In this market turmoil, high-end chip stocks have suffered heavy losses. Citigroup believes that there is no need to panic about the sharp decline, and that now is a good time to buy as the AI and memory markets have strong demand.
In Citigroup's semiconductor industry report on August 8th, it was pointed out that although chip stocks suffered a sharp decline in the second quarter of 2024, this was mainly due to macroeconomic factors and high expectations:
Due to the negative performance of companies such as [unknown], there is a general expectation of an 11% decline during the earnings season. The average quarterly decline in earnings per share is about 5%. In addition, simulation chip inventory replenishment has not been as rapid as expected, and the risk in the automotive terminal market (which accounts for 14% of semiconductor demand) is also increasing. $Intel (INTC.US)$N/A.$Microchip Technology (MCHP.US)$And.$NXP Semiconductors (NXPI.US)$Inventory replenishment of simulation chips has not yet occurred: sales expectations for other simulation companies have been downgraded.
Despite the poor performance of some companies, Citigroup remains bullish on the semiconductor market, mainly because the demand for AI and storage markets is still strong:
Due to reduced production capacity, the price of DRAM in the third quarter is better than expected, and the upward trend in prices is expected to continue. Micron Technology is our top pick, and we believe it is time to double down now.
Selling off is the result of macro factors and high expectations.
Citigroup believes that this selloff is the result of a combination of macro factors, high expectations in the semiconductor industry, and disappointing performance:
Expectations are too high: the price-to-earnings ratio of the US semiconductor index (SOX) is 37 times, a premium of 70% to the S&P 500, the highest level since 2008.
Disappointing performance: consensus EPS expectations are down 11%, mainly due to the poor performance of Intel, Microchip Technology, and NXP Semiconductors. Due to restructuring, ASML did not meet expectations, and Intel cut its capital expenditures by 25% in 2025.
PC, datacenter, and mobile phone markets have stable demand: Although the automotive/industrial terminal markets still seem weak, the demand trend for the three major terminal markets of PCs, mobile phones, and servers is relatively healthy (accounting for a total of 61% of semiconductor demand). Micron said that inventory in the traditional datacenter market improved in the first half of the year and is expected to grow in the second half of the year. During AMD's Q2 earnings conference call, they saw healthy demand signals for general computing in client and server businesses. According to [unknown]'s comments, the communication infrastructure terminal market (which accounts for 4% of semiconductor demand) seems to be rebounding from a low point.$Texas Instruments (TXN.US)$Sales expectations for other simulation companies have been downgraded.
Weak demand continues for industrial and automotive terminal markets: sales in the automotive terminal market have only dropped by 13% from the peak, far below the 30-40% decline in the industrial terminal market. We believe that sales in the industrial terminal market are bottoming out, but the decline in the automotive terminal market may be even greater.
Strong demand for AI and storage markets.
Nevertheless, Citigroup remains optimistic about the semiconductor sector, especially as demand for AI and storage markets remains strong, stating in their report:
AI and storage market demand is still strong: the fundamentals of the AI and storage markets, which account for 30% of semiconductor demand, are still strong. AI capital expenditures are increasing, and Meta and Microsoft will see significant increases in capital expenditures in 2025; it appears that DRAM prices will rise by about 15% in the third quarter of 2024, higher than the low double-digit growth expected. The DRAM market continues to improve, and we expect DRAM prices to increase by 62% year-on-year in 2024. This is due to limited supply growth and memory manufacturers allocating capacity to HBM. We expect Micron Technology to provide upward guidance when it releases earnings in September.
PC, datacenter, and mobile phone markets have stable demand: Although the automotive/industrial terminal markets still seem weak, the demand trend for the three major terminal markets of PCs, mobile phones, and servers is relatively healthy (accounting for a total of 61% of semiconductor demand). Micron said that inventory in the traditional datacenter market improved in the first half of the year and is expected to grow in the second half of the year. During AMD's Q2 earnings conference call, they saw healthy demand signals for general computing in client and server businesses. According to [unknown]'s comments, the communication infrastructure terminal market (which accounts for 4% of semiconductor demand) seems to be rebounding from a low point. $Texas Instruments (TXN.US)$N/A.$STMicroelectronics (STM.US)$and $NXP Semiconductors (NXPI.US)$ According to [unknown], the communication infrastructure terminal market (which accounts for 4% of semiconductor demand) seems to be rebounding from a low point.
Citigroup expects semiconductor sales to grow by 14% in 2024, with revenue reaching $603.2 billion. Outbound volume is expected to increase by 3% year-on-year, and average selling prices are expected to increase by 13% year-on-year.
In addition, Citigroup pointed out that given the recent selloff, it is time to double down on Micron Technology and other companies, citing tight supply in the DRAM market due to monopolies.
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