Shares of semiconductor sector favorites Micron Technology (NASDAQ: MU), Arm Holdings (NASDAQ: ARM), and ASML Holdings (NASDAQ: ASML) fell hard to begin off September, down 8%, 6.9%, and 6.5%, respectively, as of the close of trading Tuesday.
Weaker-than-expected macroeconomic data sent the complete chip sector down hard, and ASML drew attention in a trade war spat regarding China over the weekend. But is that this pullback a buying opportunity?
Weaker-than-expected manufacturing sends chips right into a tailspin
Coming into Tuesday, each of those three stocks had good-to-great results out there 12 months up to now, which perhaps set them up for more pronounced sell-offs on bad news. As of Friday’s close, Arm Holdings had soared 77% in 2024 as AI enthusiasm took hold for its newer data center and PC solutions. ASML, which is the dominant provider of the EUV lithography machines which can be crucial for the production of cutting-edge chips and memory for AI, was up by 20%, despite a July swoon. And Micron was up by just 13% as earlier enthusiasm for its AI prospects had moderated amid soft economic readings for the highly cyclical memory player.
While these three corporations have benefited from the optimism around the long run of AI, each can also be somewhat cyclical, and their results can ebb and flow with the economy.
On that front, there was pessimistic news regarding U.S. and Chinese manufacturing. On Tuesday morning, the Institute for Supply Management released its Manufacturing Purchasing Managers’ Index for August, which got here in weaker than analysts expected. The August reading was 47.2. While that was up from 46.8 in July, it was below the Dow Jones analyst consensus expectation of 47.9.
But some details were more worrying. The Latest Orders Index was worse than the general reading at 44.6, down from 47.4 in July. However the Prices Index actually rose to 54 from last month’s 52.9 reading. And the Inventories Index rose 5.8 points to 50.3.
The mix of lower orders, rising inventories, and still-rising labor and freight costs points to the worst of all possible worlds: a stagflationary setup. That would hamstring the Fed’s ability to chop rates aggressively, despite Tuesday’s downward lurch within the manufacturing sector.
Of note, there was also trouble with China over the weekend: A report showed that its manufacturing activity fell to a six-month low of 49.1 in July, marking its fourth straight reading below 50. China’s economy has been mired in a slump for a while, and doesn’t look like coming out of it anytime soon. Of note, China is an enormous purchaser of semiconductors, so weak economic activity there could impact all three of those corporations.
As well as, China threatened Monday to stop buying ASML’s equipment. Last week, it was reported that the Netherlands may restrict ASML’s sales and repair even for certain older deep ultraviolet lithography machines in China. But on Monday, an article in China’s government-backed Global Times said that China could cut off ASML “permanently” from the country if the Dutch government went ahead with those restrictions.
ASML is the outright global leader in lithography, so it’s unclear how China could replace all those machines. Still, losing that country as a market can be a nasty scenario for ASML — it got 49% of its revenue from China last quarter. While a number of the machines that will have gone there would likely be sold to corporations in other geographies if China couldn’t make its own chips, ASML may not recuperate 100% of those lost sales, and that form of move can be highly disruptive.
But it surely might not be all bad news
August’s manufacturing reading was actually not great, which fueled fears that the Federal Reserve has fallen behind the curve on its fiscal policy pivot, which could potentially result in lower U.S. economic growth and even recession in the approaching quarters.
Nevertheless, there have been a few things for semiconductor bulls to carry onto. First, while a reading below 50 indicates a contraction for the manufacturing sector, the brink of 42.5 is the extent that indicates a broader economic downturn overall, and the U.S. continues to be well above that.
Second, delving into the quotes from purchasing managers included within the report, the electronics industry manager’s quote was actually bullish: “Business outlook is nice. Recovery from the electronics slowdown is robust for the second half of the 12 months.” Moreover, the institute reported that out of the six largest manufacturing sectors, only the pc and electronics segment reported growth in recent orders and increased production.
The private electronics industry entered its downturn in late 2022 and appears to be recovering, while industrials and autos at the moment are mired in the course of their very own downturns. So while higher benchmark rates of interest appear to have contributed to a slowdown across most manufacturing sectors, the pc and electronics sector appears to be a powerful outlier — no less than for now.
Because the chip sector is essentially selling off on Tuesday’s bad economic headlines, investors should want to take the chance so as to add to their positions of their favorite chip stocks.
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Billy Duberstein and/or his clients have positions in ASML and Micron Technology. The Motley Idiot has positions in and recommends ASML. The Motley Idiot has a disclosure policy.
Why Micron, Arm Holdings, and ASML Holdings Crashed Today was originally published by The Motley Idiot