Risk to Semiconductor Stocks: Have NAND Prices Peaked?

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The world of semiconductors has enjoyed a major run higher in 2017. To prove the point: three of the top five performers of the S&P 500 Index are semiconductor stocks. Sometimes sectors get too far ahead of themselves. Whether that is the case in semiconductors today remains to be seen, particularly since every effort by investors to call a top or a peak have only been followed by higher highs.

According to Morgan Stanley’s Katy Huberty, the NAND industry is about to enter a downturn for the first time since early in 2016. The firm also sees an increase regarding earnings risks that should cap near-term valuations, with several chip stocks being hurt on the reports. Before investors blindly panic, there are actually some positives noted in the call.

The report showed that spot NAND prices were down 4% sequentially in the third quarter of 2017, and the firm sees NAND prices falling faster in the first quarter of 2018 after a seasonally strong December quarter in 2017. That drop is expected to be in the 7% to 15% range after almost two years of firm price and demand trends.

Morgan Stanley downgraded its rating on Western Digital Corp. (NASDAQ: WDC) to Equal Weight from Overweight. The firm also slashed its target price to $90 from $117. Western Digital shares were down by almost 7% at $86.36 in afternoon trading on Monday.

When it comes to Western Digital, Huberty is worried that, on top of deteriorating NAND prices, uncertainty regarding its Toshiba Memory joint venture weigh on the company. The firm is signaling that the NAND industry’s supply growth will catch up and outpace demand for the first time in about two years.

Taiwan Semiconductor Manufacturing Co. (NYSE: TSM) and Samsung were downgraded to Equal Weight from Overweight by Morgan Stanley as well. Taiwan Semiconductor’s American depositary shares were down more than 4% at $41.16 on Monday in afternoon trading, with a 52-week range of $28.34 to $43.02 and a consensus analyst target price of $36.52.

Morgan Stanley also downgraded shares of Himax Technologies Inc. (NASDAQ: HIMX) to Equal Weight from Overweight with a $12 price target. Its shares were last seen down 1% at $12.93, in a 52-week range of $4.88 to $13.88 and with a consensus target price of $11.04.

Micron Technology Inc. (NASDAQ: MU) is also a huge player in NAND. Its shares have recovered handily over much of 2017 due to strong demand and strong pricing in NAND and in DRAM. Micron shares were last seen down by more than 3% at $48.06, but that is with Morgan Stanley’s team effectively telling its clients not to worry about how NAND prices will impact Micron because of strength in DRAM. Interestingly enough, Morgan Stanley actually raised its target price on Micron to $55 from $39 in the early call.

In an effort to show both sides of the coin, note that the site DRAMExchange.com, which updates price and demand trends on DRAM and NAND pricing, showed in mid-November:

  • 4Q17 Mobile DRAM Sales Growth May Outperform Q3’s 4.3% as Prices Surge
  • 3Q17 Branded NAND Flash Sales Up 14.3% on Tight Supplies
  • Global Smartphone Production for 4Q17 to Grow by 6.3% YoY as iPhone X Drives Quarterly Total to Its Peak for the Year
  • Average DRAM Price Up Near 10%; Q3 Revenue Growth Reaches 16.2%, a New High

The VanEck Vectors Semiconductor ETF (NYSE: SMH), formerly the Semiconductor HOLDRS, was trading down 1.3% at $104.36 on Monday, in a 52-week range of $67.49 to $105.83. This exchange traded funds holds 26 semiconductor related shares and has roughly $1.5 billion in assets. Taiwan Semiconductor represents over 10% of the assets here and is the top holding, followed by Intel (9.5%), Micron (5.8), Qualcomm (5.7%) and NVIDIA (5.7%).