Have Semiconductor Stocks Peaked?

Semiconductors tend to be a leading indicator for technology as they effectively supply the components that allow for many modern day innovations. The semiconductors and semiconductor equipment industry has had a strong 2016, which is likely an indication that growth will flow through to other industries. However, given the industry’s massive growth along with its historical cyclicality, investors are closely monitoring sentiment along with earnings to determine if the cycle has peaked.

Let’s review some of Thomson Reuters’ predictive analytic models using Micron Technologies Inc. (MU.O) as an example to show how sentiment can enhance the ability to navigate this industry.

Exhibit 1. Micron vs. Industry Benchmarks YTD % Price Change as of Dec. 21, 2016

Source: Eikon

Where to look

Following the industry isn’t for the faint of heart and while history shows it to be an important indicator of future growth, the signals aren’t always clear. Two popular industry benchmarks are the iShares PHLX Semiconductor ETF (SOXX.O) and the S&P 500 Semiconductors & Semiconductor Equipment Index (Industry Group) (.SPLRCSE), which are respectively up 38.4% YTD and 28.7% YTD, as of Dec. 21, 2016. While these benchmarks provide a broad view of market sentiment for the industry, there are many moving parts underneath. Therefore, knowing where to look is critical. With processor related companies more commonly well known, especially after massive YTD price increases from companies such as Nvidia Corp. (NVDA.O), up 221% YTD, and Advanced Micro Devices Inc. (AMD.O), up 300% YTD, memory makers like Micron demand real attention at the moment.

Healthy memory

After a 45.3% YTD increase in share price, Micron shares surged another 9.91% to $22.62 per share in afterhours trading on Dec. 21, 2016 following the fiscal 1Q17 earnings release. Earnings per share came in at $0.32 per share to beat the consensus of $0.28 per share. Revenue of $3.97 billion was shy of the $3.98 billion analysts expected. However, the industry tends to be far more focused on future expectations. Therefore, guidance is particularly important. Micron expects 2Q17 revenue between $4.35 billion to $4.7 billion and EPS of $0.58 to $0.68 per share. Both beat analyst expectations, which were revenue of $3.91 billion and earnings of $0.39 per share.

Among the highlights from the conference call were an improved PC market and constrained DRAM supply that helps to increase average selling prices (ASP’s) and improvements to gross margin that are expected to continue into 2017.

Micron CEO Mark Durcan said, “To give you some perspective on pricing dynamics, after declining for roughly 18 months, PC DRAM ASPs are up 50% to 60% compared to the trough pricing, driven by an improvement in demand, historically low inventory levels and the impact of supply shifts to other segments. In contrast, all other DRAM segments declined substantially less over the same period and are recovering at a slower rate.”

He went on to say, “Turning to the industry outlook, we currently expect 2017 DRAM bit supply growth in the 15% to 20% range. This is based on an assumption that suppliers won’t add significant wafer capacity to the industry, but will continue to focus on process node migrations to enable cost reductions and natural supply growth. This compares to our long-term bit demand growth forecast of approximately 20% to 25%. We expect favorable supply and demand dynamics to persist in 2017.”

Exhibit 2. StarMine ARM Component Scores for Micron Ahead of ER

Source: Eikon

Bullish sentiment

Given the historical nature of the industry and a 45.3% YTD price increase, it is easy to see how some could be skeptical of Micron’s ability to deliver share-moving results. However, there were several strong indicators that predicted these strong results.

Our StarMine Analyst Revisions Model (ARM) measures analyst sentiment on a scale of 1 to 100 with 100 being the most bullish. Heading into Micron’s conference call, its ARM score of 100 placed it among the companies in North America that analysts liked the most.

The ARM model takes a more comprehensive view of analyst revisions than the typical measure that just looks at the change in the EPS consensus for the current quarter over the last 30 days. ARM reflects revisions for the current quarter, full year and next year. And it extends beyond EPS to revisions in EBITDA and revenue.

It also incorporates recommendation changes and the proprietary Predicted Surprise measure. The Predicted Surprise is the percentage difference between the consensus and the StarMine SmartEstimate®, which reweights the consensus to place more weight on the more recent estimates from the most accurate analysts. It is predictive of the direction of future revisions and a reinforcing signal when it heads in the same direction as the change in consensus, with an accuracy rate of 70% for earnings. Revenue SmartEstimates are even more predictive of surprises, with a historical accuracy rate of 78%.

Exhibit 2 shows analysts had consistently increased both revenue and EPS estimates for both the current and future periods ahead of Micron’s fiscal 1Q17 earnings release. Additionally, the SmartEstimates® tended to directionally lead future revisions. Finally, we can see Predicted Surprises greater than 2% for EPS across all periods supported by positive predicted surprises for revenue, especially in later periods. Therefore, given the historical accuracy of our Predicted Surprise models and strong ARM scores Micron’s EPS beat and higher-than-expected revenue and earnings guidance was more probable than it may have appeared.

Exhibit 3. News Sentiment and Research Events for Micron

Source: Eikon

Hot off the press

In addition to analyst sentiment, we can look at News Analytics for sentiment along with important reports from top rated analysts.

Exhibit 3 shows Micron’s price (orange) compared to the 20 day moving average of news sentiment (blue). We can see that news sentiment became increasingly bullish ahead of Micron’s Dec. 21, 2016 earnings release. We can see that news sentiment became increasingly bullish ahead of Micron’s Dec. 21, 2016 earnings release. The chart also shows the research events (pink circles with “R”) by analysts with a rating of 4 or 5 (based on a scale of 1 to 5 with 5 being the highest).

It’s been said that semiconductors are the modern day version of copper as a leading indicator for future growth. Predictive analytic tools such as our StarMine’s Analyst Revisions Model, SmartEstimates® and News Analytics can help navigate the complex space.

Download the full report here.

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