Semiconductor stocks have shown remarkable resilience. Despite trade issues and weakening cloud and industrial end demand, the SOX is up 32% year-to-date. Last week distributor Arrow missed guidance for the first time in ten years, blaming component softness and continued inventory build. The chip stocks traded off slightly the next day then resumed their rise. Are stocks discounting a now 2020 recovery or is comeuppance still ahead?
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The Wolfe Tech Universe declined by 0.7% the past week, better than the S&P 500’s 1.2% fall. Semis were the only sector to post a positive result despite Arrow’s warning of weak demand and inventory build. Top weekly performers included Infinera (+19%), CrowdStrike (+14%), ASML Holdings (+8%), Cloudera (+8%), and KLA-Tencor (+7%). Laggards were Symantec (-13%), Snap (-10%), Zebra Tech (-9%), Nutanix (-9%), and SAP (-9%). IBM, ASML, Elastic, and PagSeguro are overbought while Slack, Micro Focus, Rightmove, and Pivotal are oversold (p4).
Microsoft reported another strong quarter. Azure growth of 64% (68% constant currency) slowed a bit, but a larger base makes deceleration inevitable. More important, it shows that despite talk of repatriation of workloads back on-prem and reduced cloud component purchases, the public cloud trend remains strong and Microsoft is gaining share.
After the close yesterday, Arrow Electronics preannounced 2Q EPS of $1.50-1.62 vs. guidance of $1.94-2.06 on preliminary revenues of $7.30bn vs. guidance of $7.525-7.925bn. The miss was mostly in its larger components business with enterprise computing solution sales weak but expected. CEO Michael Long said, “It has been 42 quarters or over ten years since we last delivered earnings per share results that are below our expected range.” The stock was off 5% in the aftermarket. We expect Semis and perhaps some Hardware names to be negatively impacted today. Our eye has been on Semis approaching resistance.
AI has proven its worth by beating champions in chess, Jeopardy, and Go. Now Noam Brown of Facebook and Tuomas Sandholm of Carnegie Mellon have created an AI system called Pluribus that competes with the best poker players. Darren Elias, who holds a record four World Poker Tour titles, and Jesus Ferguson were bested in an on-line game of 5,000 hands, and six pros were beaten over 10,000 hands. Pluribus knows how to play the percentages and even bluff and read bluffs. “It does all the things the best players in the world do,” remarked Elias
The Wolfe Tech Universe rose 0.9% the past week, in line with the broader market. Hardware and Semis continue to be the laggards over both 3-and 12-months (Exhibit 1). Top weekly performers included Acacia (+34%), Slack (+30%), Elastic (+19%), Western Digital (+14%), and Square (+10%). Laggards were Micro Focus (-17%), Zebra Tech (-8%), Asustek (-7%), AAC Tech (-7%), and SINA (-6%). Software is up to a median P/E of 38x and P/S of 7x (Exhibit 4).
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