Revisiting the V bottom in Chip Equipment Makers

Semiconductor equipment companies produce the complex (and expensive) machines that are used to manufacture semiconductor chips. Although both industries are tied to the world’s insatiable demand for chips, their stock prices exhibit very dissimilar returns over various slices of time. This chart demonstrates the relative performance between the Semiconductor Equipment Index and the Semiconductor Index. Note that when the blue line is rising, the equipment manufacturers are outperforming the chip makers. When the blue line is declining, the opposite holds true. Semiconductor Equipment Index As the chart shows, equipment maker relative performance reversed from roughly the same level 4 times since March 2010. Following each reversal, the equipment maker index produced stellar gains far outpacing the Russell 1000 Growth and semiconductor makers. We first flagged a potential bullish reversal in semiconductor equipment stocks in July 2018, click here to view. We were a few months early, as relative performance did not bottom until October 2018. However, since that time equipment makers are up 51.8% vs. a gain of 14.8% and 10.4% for chip makers and the Russell 1000 Growth, respectively. Worldwide Semiconductor Market Billings For better or worse, we were not as prescient in forecasting overall semiconductor market billings. In that same July 2018 note, we stated that we “did not see a cycle peak on the near/intermediate-term time horizon.” That prediction turned out to be misplaced, as global semiconductor billings fell more than 20% between October 2018 and July 2019. With the full benefit of hindsight, it now appears that the chip equipment makers spent most of 2018 discounting the coming lull in chip orders. Similarly, the equipment makers have rallied hard since last fall, probably in anticipation of a recovery in chip orders that appears to be on tap for the last several months of 2019. The takeaway: while there is probably more room for semiconductor equipment stocks to run into early 2020, we are looking to get more constructive on chip stocks over the next three to six months.