U.S. chip stocks fall as market worries over semiconductor outlook grow

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The decline in chip stocks in the U.S. stock market this week has raised investor concerns that as some chip companies have issued earnings warnings, analysts say the semiconductor industry may face a decline in earnings in the fourth quarter and the first quarter of next year. Media reports say several semiconductor companies are reeling from their own problems, but overall, the industry's poor performance and increasingly cautious expectations are sounding alarm bells for technology and the broader stock market.

Chipmaker AMD suffered the biggest drop in share prices recently, with its shares falling 15% on Thursday alone. On Wednesday, the VanEck Vectors Semiconductor ETF, an exchange-traded fund that tracks semiconductor stocks, fell 6.7%, the biggest one-day drop since the financial crisis in November 2008. Even though the fund rebounded on Thursday, it has fallen 14% since October.

Earlier this week, a warning from Texas Instruments Inc raised concerns about the chip industry's earnings outlook for the fourth quarter and next year.

Intel reported better-than-expected earnings Thursday afternoon and raised its earnings forecast for the year, but the company's stock did not open significantly higher on Friday.

“Semiconductors touch almost every industry,” said Dan Niles, founding partner of technology fund AlphaOne Capital Partners. He said earnings warnings from semiconductor companies are not new, but when Texas Instruments warned of a slowdown in all of its end markets, including automotive and aerospace, it showed that the impact on the semiconductor industry was extraordinary.

"You see companies like Texas Instruments, which had been doing very well until mid-September," Niles said. "And now they are missing their quarterly revenue guidance for the first time since the fourth quarter of 2015."

The investor also said, "The upcoming holiday season is usually the quarter when companies achieve their best sales performance, but they are slashing orders at this time, which undoubtedly reveals a pretty strong signal that something may be happening in the industry."

The industry expects AMD to continue to see strong revenue growth from the cryptocurrency mining business, while other companies are not. This is also the reason why AMD stock has been the only one to stand out while other stocks have fallen sharply.

Concerns about memory chip and DRAM prices hurt chip stocks this summer.

"The broader signal they're sending is that risks are likely to be there as we head into the fourth quarter and the first quarter of next year," said Craig Ellis, an analyst at brokerage B. Riley FBR. "The uncertainty around global trade is going to cause them to instinctively reduce orders and draw down inventories."

Ellis said he expects to hear more warnings like Texas Instruments' as more earnings reports come in. The message from Texas Instruments reverberated loudest through the broader market, raising concerns that the current global economic situation will hurt chip industry profit growth in the fourth quarter and next year.

"I think that's what investors are most worried about," said Lori Calvasina, chief U.S. equity strategist at financial services firm RBC. "Investors are very uneasy about the lack of demand. Most companies say the underlying economic backdrop and demand are good, but there are some sectors that investors are spooked by, and semiconductors are one of them."

The hit to AMD means a well-performing stock is taking a hit.

“Semiconductor stocks have been weak, and AMD and Nvidia are two stocks that have been doing well, and they are the only two stocks left that are doing well,” said Paul Hickey, co-founder of Bespoke.

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