What Friday's downgrade of Micron means for our chipmaker stocks

Published Fri, Jun 3 20226:17 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

Technology stocks were hit hard Friday, and semiconductor firms were squarely in the path of the storm. Rising bond yields are part of the broader tech story. For the chip stocks, in particular, there appears to be another issue dragging the group down: an analyst downgrade of Micron Technology (MU). All four semiconductor stocks we own were down Friday, but we did not tinker with our positions. We held steady, and wanted to use this occasion to drive home a key point for investors — the importance of knowing what you own and why you own it. What's happening Shares of Micron tumbled 7% Friday, after Piper Sandler analyst Harsh Kumar downgraded the stock to underweight from neutral. He cited Micron's exposure to cyclical consumer markets such as smartphones and PCs, believing slowdowns in purchases on those products is bad news for Micron. "Today, the company has roughly 55% exposure to PCs, mobile, and other markets. In addition, the [dynamic random-access memory] market, which represents over 70% of total revenue, has already started to see price declines for most configurations," Kumar wrote. The analyst isn't negative on every part of Micron, though, and this is important for the point we're making overall. "As of right now, we are only confident in the company's data center business, which represents less than 30% of total company revenue," Kumar wrote. What it means for us Beneath the surface, the semiconductor industry is complex. There's a general understanding that these chips are super important in our digitizing world; some call them the brains of modern electronics. Not every chip designer is the same. They design different kinds of chips for different end markets — from gaming consoles to smartphones to PCs to automotive. For a variety of reasons, that nuance isn't always reflected in stock moves. One reason is exchange-traded funds that bundle a bunch of chip stocks together, creating a sort of ETF-ization of the market. Heavy selling in a semi ETF such as the VanEck Semiconductor ETF (SMH) because of the Micron downgrade results in pressure on all chip names — even if they each serve different end markets. As owners of individual stocks, it's crucial we see through it, that we understand what's driving the news and whether it has substantive impact on the names we're invested in. As we saw during this earnings season with the retail industry, some companies can do w