Ryan Vlastelica (Bloomberg) -- Semiconductor companies sank on Monday, extending their recent slide, as concerns continued to mount over the coronavirus outbreak and the impact it could have on both sales and supply chains.
The Philadelphia Semiconductor Index tumbled as much as 5.4% in its biggest one-day drop since January 2019. The benchmark index is on track for a third straight losing session, and has lost as much as 10% over the three-day slump.
In the latest development, the virus spread further outside China, sparking concerns about a global pandemic and driving a broad decline in equity prices.
Cases of the virus “are now showing up in South Korea, Taiwan, Italy, Iran and some in Japan,” and “it could start to impact normal travel and functioning of supply chains in PC, Server, handsets, and Memory,” wrote Mizuho Securities analyst Vijay Rakesh. He said the impact of the virus would depend on the length of disruptions, but added that “we have not seen the peak of this virus’s spread yet.”
Losses were widespread across the sector, with every stock in the index falling. Among major decliners, Advanced Micro Devices Inc. shed as much as 11% in what represented its biggest intraday percentage loss since December 2018. While AMD is gaining market share in graphics processing units (GPUs), the outbreak “creates risk for the GPU market,” wrote David Wong, an analyst at Nomura Instinet. He added that should the virus lead to any economic weakening in China or other countries, “there could be an impact in demand in many semiconductor end markets.”
Nvidia Inc. briefly fell as much as 8.9% and Applied Materials dropped 6%. Lam Research Corp. was down as much as 6.8%. Earlier, Citi closed its catalyst watch on the stock, seeing “increasing risk from labor supply chain shortages” as a result of “growing disruption” from the virus.
The recent weakness comes after a big rally for chipmakers. The SOX closed at a record just last week, and it remains up about 40% from a May low. Sanford C. Bernstein analyst Stacy Rasgon warned that the sector was “one of the most crowded” industry groups within technology, which itself was “the most crowded sector in the U.S. market,” meaning it is overrepresented in the portfolios of active managers.
“Times of market stress or uncertainty can trigger de-risking and simultaneous selling of crowded trades, with illiquidity on exit exacerbating drawdowns,” Rasgon wrote. According to his analysis, AMD is “among the most crowded in the industry,” along with Nvidia and NXP Semiconductors.
“We have been nervous on the space given elevated multiples, declining earnings,” and the virus. “High levels of crowding seem to be one more potential risk.”
