Bank of America released a research report indicating that the performance of the USA semiconductor industry is expected to exceed expectations in the first quarter, with the second quarter outlook meeting expectations but facing significant uncertainties. Regarding tariff impacts, it is anticipated that American chip companies will generally express concerns about headwinds in demand for the second half of the year, leading Bank of America to lower the Target Price for companies under its coverage to reflect increased uncertainty.
The Earnings Reports season for the semiconductor industry will kick off on Wednesday by$ASML Holding (ASML.US)$Thursday$Taiwan Semiconductor (TSM.US)$releasing their Earnings Reports, followed by other American semiconductor and semiconductor equipment industry peers, who will gradually announce their performance in the following week. For American chip suppliers, their first-quarter performance is expected to exceed expectations because their initial performance forecasts may be somewhat conservative, and the tariff-related demand pull-forward has created a better demand environment. However, the outlook for the second quarter may meet expectations as companies might expand their earnings guidance range.
Regarding the impact of tariffs, Bank of America expects USA chip companies to:
1) For the early releasing companies ( $Taiwan Semiconductor (TSM.US)$ 、 $ASML Holding (ASML.US)$ 、$Texas Instruments (TXN.US)$、 $Lam Research (LRCX.US)$ Get signals, etc.;
2) Generally express concerns about headwinds in demand for the second half of the year;
3) The inflation in the supply chain caused by Algo is leading to gross margin headwinds (for example,$NVIDIA (NVDA.US)$、 $Advanced Micro Devices (AMD.US)$ a higher proportion of US procurement).
Overall, uncertainty in the Semiconductor Industry will continue to exist until aspects such as new industry tariff rates (in the coming weeks), retaliation measures from China, reciprocal tariffs from the USA, and AI Diffusion rules (May 15) become clearer. On a positive note, despite downward adjustments in earnings expectations, the outlook for the cloud/AI sector (NVIDIA,$Broadcom (AVGO.US)$) In the field of design software ($Cadence Design Systems (CDNS.US)$、$Synopsys (SNPS.US)$) and in the field of Semiconductors equipment ( $Lam Research (LRCX.US)$ 、$KLA Corp (KLAC.US)$) Of high-quality companies, valuations have become more attractive.
Moderate tariffs lead to a sales decline of 4-6%, while high tariffs cause a decline of 9-12%.
Bank of America listed two potential scenarios: moderate tariff impact and severe tariff impact.
Bank of America's moderate scenario assumes limited tariff measures between China and the USA, while the severe scenario means implementing sector-specific tariffs on Semiconductors/Electronics (specific rates have yet to be announced).
(1) In a moderate scenario, compared to current market consensus, tariffs may lead to a sales decline of approximately 4% in FY 2025 and about 6% in FY 2026, with EPS declining mostly between 5-25% (averaging 12-13%), including a gross margin decline of 150 basis points.
(2) In a severe scenario, profit expectations may be further downgraded, with sales declining by 9%/12% in FY 2025/2026 respectively, and EPS declining mostly between 15-50% (averaging 25-30%), including a gross margin decline of 500 basis points.
It is expected that the AI/cloud sector will be more resilient than the consumer and auto sectors. In terms of income impact, companies involved in AI/cloud/industrial fields are expected to perform better in the face of potential demand decline caused by tariffs, while companies focusing on consumer/auto sectors face greater risks.
$NVIDIA (NVDA.US)$ 、 $Lam Research (LRCX.US)$ 、$Cadence Design Systems (CDNS.US)$ 、 $Synopsys (SNPS.US)$ 、 $Nova (NVMI.US)$ 、$Camtek (CAMT.US)$、$Applied Materials (AMAT.US)$The potential sales impact on such companies is minimal (sales impact is between -1% and -6%), while$Arm Holdings (ARM.US)$ 、 $Intel (INTC.US)$ 、$NXP Semiconductors (NXPI.US)$、$ON Semiconductor (ON.US)$、$Skyworks Solutions (SWKS.US)$、$Qorvo (QRVO.US)$、$Axcelis Technologies (ACLS.US)$The performance of such companies may be poor (sales impact between -7% to -9%).
Importantly, even in the above serious EPS scenario (high tariffs), NVIDIA,$Micron Technology (MU.US)$、 $Synopsys (SNPS.US)$ 、$Marvell Technology (MRVL.US)$ 、$Credo Technology (CRDO.US)$Based on the current stock price, there is still over 30% potential upside compared to historical PE or PEG ratios.
Lower the target prices for covered companies to reflect increased uncertainty.
In a moderate tariff scenario, the EPS decline of 12-13% (2-2.5 times sales) is significantly lower than the 30-40% decline we observed during previous market downturns.
However, the main concern is the compression of PE ratios due to increasing market risks.$PHLX Semiconductor Index (.SOX.US)$The current forward PE ratio is about 18 times, lower than the 20 times of the S&P 500 Index (SPX), but higher than the 12-14 times PE ratio during the previous downturns in the semiconductors industry (FY 2018, FY 2022).
Importantly, the SOX Index has basically given back the 20% PE premium gained from the AI-driven stock price increase in the 2023/2024 fiscal year.
(The last column indicates the extent of the target price reduction.)
Editor/lambor
