Shares of favorites in the semiconductor sector Micron technology (NASDAQ: MU), Arm Holdings (NASDAQ: ARM)And ASML holdings (NASDAQ: ASML) fell sharply in early September, down 8%, 6.9% and 6.5% respectively by the close of trading on Tuesday.
Weaker-than-expected macro data sent the entire chip sector plummeting, with ASML finding itself in the spotlight of a trade war involving China over the weekend. But is this pullback a buying opportunity?
Weaker than expected production causes chip decline
On Tuesday, each of these three stocks had good to great market results so far, perhaps setting them up for more pronounced selloffs on bad news. By Friday’s close, Arm Holdings was up 77% for 2024 as AI enthusiasm fueled its newer data center and PC solutions. ASML, the dominant supplier of the EUV lithography machines critical to the production of advanced chips and memory for AI, was up 20% despite a July slump. And Micron was up just 13% as earlier enthusiasm for its AI prospects was tempered amid soft economic readings for the highly cyclical memory player.
While these three companies have benefited from optimism about the future of AI, they are both somewhat cyclical and their results can fluctuate with the economy.
On that front, there was pessimistic news about U.S. and Chinese manufacturing. On Tuesday morning, the Institute for Supply Management released its Manufacturing Purchasing Managers’ Index for August, which came in weaker than analysts had expected. The August reading was 47.2. While that was up from 46.8 in July, it was below the Dow Jones analyst consensus estimate of 47.9.
But some details were more worrying. The New Orders Index was worse than the overall reading at 44.6, down from 47.4 in July. But the Prices Index actually rose to 54 from a reading of 52.9 last month. And the Inventory Index rose 5.8 points to 50.3.
The combination of lower orders, rising inventories and still-rising labor and freight costs points to the worst of all possible worlds: a stagflationary stance. That could hamper the Fed’s ability to cut rates aggressively, despite Tuesday’s downturn in manufacturing.
Notably, there were also issues in China this weekend, with a report showing manufacturing activity falling to a six-month low of 49.1 in July, marking the fourth consecutive reading below 50. The Chinese economy has been in a slump for a while now and shows no signs of coming out of it anytime soon. Notably, China is a major buyer of semiconductors, so weak economic activity there could impact all three of these companies.
In addition, China threatened Monday to stop buying ASML’s equipment. Last week, it was reported that the Netherlands could restrict ASML’s sales and service, even for certain older deep ultraviolet lithography machines in China. But on Monday, an article appeared in the Chinese government-backed Worldwide times said China could “permanently” cut off ASML from the country if the Dutch government continued with those restrictions.
ASML is the absolute world leader in lithography, so it’s unclear how China would replace all those machines. Still, losing that country as a market would be a bad scenario for ASML — it got 49% of its revenue from China last quarter. While some of the machines that would have gone there would likely be sold to companies in other regions if China couldn’t make its own chips, ASML might not recoup 100% of that lost revenue, and such a move would be highly disruptive.
But it might not be all bad news
Manufacturing numbers in August were far from positive, fueling fears that the Federal Reserve is lagging behind on fiscal policy, potentially leading to slower U.S. economic growth or even a recession in the coming quarters.
There were a few things semiconductor bulls could hold on to, though. First, while a reading below 50 signals a contraction for the manufacturing sector, the 42.5 threshold is the level that signals a broader economic downturn in general, and the U.S. is still well above that.
Second, if we look at the quotes from purchasing managers included in the report, the quote from the electronics industry manager was actually optimistic: “The business outlook is good. The recovery from the electronics slowdown is strong for the second half of the year.” Furthermore, the institute reported that of the six largest manufacturing sectors, only the computer and electronics segment reported growth in new orders and increased production.
The personal electronics industry entered a recession in late 2022 and appears to be recovering, while industrials and autos are now in the midst of their own recessions. So while higher benchmark interest rates appear to have contributed to a slowdown in most manufacturing sectors, the computer and electronics sector appears to be a strong outlier – at least for now.
With the chip sector largely selling off on Tuesday amid poor economic headlines, investors may take the opportunity to add to their positions in their favorite chip stocks.
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Billy Duberstein and/or his clients have positions in ASML and Micron Technology. The Motley Fool has positions in and recommends ASML. The Motley Fool has a disclosure policy.
Why Micron, Arm Holdings, and ASML Holdings Crashed Today was originally published by The Motley Fool
