Chip stocks fall after Goldman and others warn they've gotten ahead of themselves

  • Chipmakers and semiconductor equipment stocks fell across the board Friday following the gloomy analyst notes.
  • "Our recent industry discussions suggest that memory fundamentals remain very soft, and prices continue to decline," Goldman analyst Mark Delaney wrote.
  • The Goldman warning comes amid a strong rally in chipmaker stocks, which bounced off a steep December decline and have since posted double-digit gains.
Microprocessors sit on a circuit board at the NXP Semiconductors NV pavilion at the Mobile World Congress in Barcelona, Spain.
Simon Dawson | Bloomberg | Getty Images
Microprocessors sit on a circuit board at the NXP Semiconductors NV pavilion at the Mobile World Congress in Barcelona, Spain.

Semiconductor stocks fell across the board Friday after Goldman Sachs and another brokerage warned clients that the industry's 2019 rally looks excessive compared with chip demand expectations.

"Our recent industry discussions suggest that memory fundamentals remain very soft, and prices continue to decline," Goldman analyst Mark Delaney wrote. "This is in contrast to the significant rally in the memory and HDD stocks year to date even on weak fundamentals."

Applied Materials fell 1.2 percent, Nvidia dropped 1.3 percent, Advanced Micro Devices declined 1.2 percent, Lam Research retreated 0.8 percent and Micron shed 2.6 percent. The iShares PHLX Semiconductors ETF dropped 1 percent.

The VanEck Vectors Semiconductor ETF is currently up 0.18 percent week to date, on pace for its fifth straight weekly gain for the first time since Aug. 3.

"We now believe that EPS scenarios that investors considered unlikely six months ago when memory started to roll are rising in probability," Delaney continued. "For example, we believe that the $3.00 to $4.00 downside case EPS scenario that we published in our Micron downgrade note last September is now a base case."

The Goldman warning comes amid a strong rally in chipmaker stocks, which bounced off a steep December decline and have since posted double-digit gains to start the new year. Angst mounted in the semiconductors space in late 2018 amid the U.S.-China trade war and general concerns around China's economic growth. Demand also slowed between softer iPhone sales and a deceleration in cryptocurrency mining ventures.

And while those fears abated in the final days of 2018 and into the new year, Goldman and others have cautioned that the pain may not be over yet.

"Our near-term caution about being too early on memory is not just about avoiding catching a falling knife, but also the fact that upturns typically last for a year or longer," Delaney added. "It's only the second quarter of the DRAM downturn, and while NAND has been weak for several quarters there are still high levels of NAND inventory and demand in key markets like smartphones is quite weak."

Also weighing on the chipmaker space Friday was Qorvo's quarterly earnings report. While the Greensboro, North Carolina-based semiconductor company topped analyst profit expectations in the third quarter, it offered fourth-quarter earnings guidance of $1.05, well below consensus estimates of $1.33. The company reported earnings Thursday after the market close.

"Qorvo's March quarterly guidance reflects weakness in the broader smartphone market, partially offset by content gains with the leading Korea-based smartphone manufacturer and double-digit, year-over-year growth in IDP," Chief Financial Officer Mark Murphy said of the projection. Qorvo's stock was last seen down more than 6 percent.

Mizuho also penned a more bearish note on semiconductor stocks Friday. Analyst Vijay Rakesh downgraded Dutch chip manufacturer NXP Semiconductors, telling clients that while management's cost control initiative is appreciated, the company's 2019 global GDP outlook looks a little optimistic. Further, the stock's valuation seems steep after a 40 percent rally since December, the analyst wrote.

"While CEO Rick Clemmer and CFO Peter Kelly have executed well with cost controls and steering the company, we are moving to the sidelines as we see continued challenges in China and Europe with auto and industrial headwinds limiting meaningful upside," he wrote.

NXP fell 2.8 percent Friday.

— CNBC's Michael Bloom contributed reporting.