Shares of prominent semiconductor companies, Micron Technology (-7.96%), Arm Holdings (-6.88%), and ASML Holdings (-6.47%), experienced significant declines at the onset of September. By the end of trading on Tuesday, their shares had dropped by approximately 8%, 6.9%, and 6.5%, respectively.
A series of disappointing macroeconomic indicators triggered a sharp downturn across the chip sector, with ASML further drawing attention due to a trade dispute involving China over the weekend. The question now is whether this decline presents a buying opportunity.
Weak Manufacturing Data Sends Chip Stocks Plummeting
Before Tuesday, these stocks had demonstrated strong performance year-to-date, setting the stage for potentially pronounced sell-offs upon encountering negative news. As of last Friday’s close, Arm Holdings had soared 77% in 2024, fueled by AI enthusiasm surrounding its new data center and PC solutions. ASML, the leading supplier of EUV lithography machines essential for producing advanced chips and AI-related memory, had risen by 20%, despite a setback in July. Meanwhile, Micron’s shares had increased by a modest 13%, as previous excitement over its AI potential waned amid lackluster economic indicators for the highly cyclical memory market.
While these companies have capitalized on the burgeoning optimism surrounding AI’s future, they remain cyclically sensitive, with their performance ebbing and flowing in tandem with the broader economy.
In this regard, recent news concerning U.S. and Chinese manufacturing was concerning. On Tuesday morning, the Institute for Supply Management released its Manufacturing Purchasing Managers’ Index for August, which fell short of analysts’ expectations. The August reading was 47.2, slightly up from July’s 46.8 but below the Dow Jones analyst consensus of 47.9.
Certain details were particularly troubling. The New Orders Index registered a reading of 44.6, a decline from July’s 47.4. Conversely, the Prices Index rose to 54 from 52.9 in the previous month, while the Inventories Index increased by 5.8 points to 50.3.
This combination of declining orders, rising inventories, and escalating labor and freight costs paints a grim picture: a stagflationary environment that could limit the Federal Reserve’s ability to aggressively cut rates, even with the manufacturing sector’s downturn on Tuesday.
Compounding matters, China posed additional challenges over the weekend. A report revealed that its manufacturing activity had fallen to a six-month low of 49.1 in July, marking the fourth consecutive month below 50. China’s economy has been languishing in a prolonged slump, showing no signs of an imminent recovery. As China is a major semiconductor buyer, its economic weakness could impact all three companies.
Additionally, China threatened on Monday to cease purchasing ASML’s equipment. Reports last week suggested that the Netherlands might restrict ASML’s sales and services, even for certain older deep ultraviolet lithography machines in China. On Monday, an article in China’s government-backed Global Times warned that China could permanently sever ties with ASML if the Dutch government proceeded with these restrictions.
ASML dominates the global lithography market, making it difficult for China to replace these machines. However, losing China as a market would be detrimental for ASML, as 49% of its revenue last quarter came from China. Although some machines may find buyers in other regions if China cannot produce its chips, ASML might not fully recover those lost sales, and such a scenario would be highly disruptive.
Glimmers of Hope Amidst Economic Woes
August’s manufacturing data was far from encouraging, stoking fears that the Federal Reserve may have fallen behind in its fiscal policy adjustments, potentially leading to slower U.S. economic growth or even a recession in the upcoming quarters.
However, semiconductor investors can find solace in a few positive aspects. First, although a reading below 50 signals contraction in the manufacturing sector, the threshold indicating a broader economic downturn is 42.5, and the U.S. remains well above that level.
Second, delving into the report’s purchasing manager quotes, the electronics industry’s manager offered a bullish perspective: “Business outlook is good. Recovery from the electronics slowdown is strong for the second half of the year.” Furthermore, the institute noted that out of the six largest manufacturing sectors, only the computer and electronics segment reported growth in new orders and increased production.
The personal electronics industry, which began its downturn in late 2022, seems to be rebounding, while the industrial and automotive sectors are currently in the midst of their respective downturns. While elevated benchmark interest rates appear to have slowed most manufacturing sectors, the computer and electronics sector stands out as a resilient outlier—for now.
Given the chip sector’s sell-off due to Tuesday’s unfavorable economic news, investors might consider this an opportunity to strengthen their positions in favored chip stocks.
