Semiconductor market seen as ‘a den of bears’ due to recession, Taiwan invasion fears

Investors looking at the semiconductor companies as a source of opportunity may want to think again, according to a new assessment of the sector by Citi analyst Christopher Danely.

On Monday, Danely said the market for semiconductor stocks is looking increasingly grim. The ongoing war between Russia and Ukraine is front and center on many investors’ minds, and Danely said the situation isn’t helped at all due to growing sentiment about the possibility of an economic recession and fears about China invading Taiwan.

“It’s a den of bears out there,” Danely said, who added that build ups in semiconductor inventor are creating higher risks and an environment for poor rewards “if you believe a recession is coming.”

Danely said that after meeting with “several investors”, the sentiment toward companies that rely heavily on chip foundry Taiwan Semiconductor (NYSE:TSM), such as Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) is turning “bearish” due to the chances that China might set its sights on invading Taiwan, which Beijing considering to be a “renegade province.” Danely added that a large amount of chip sector negative surrounds companies big in the automotive industry such as NXP Semi (NASDAQ:NXPI), Texas Instruments (NASDAQ:TXN), On Semiconductor (NASDAQ:ON), Microchip Technology (NASDAQ:MCHP) and Analog Devices (NASDAQ:ADI).

“[There is] a huge disparity between auto semi revenues and auto production levels,” said Danely, who estimates that while semiconductor automotive units should rise 41% this year from a year ago, auto production is expected to decline from its previous peak levels.

Danely also said there are “more yellow flags” of caution emerging from the PC market, such as notebook shipments in February coming in below expectations amid rising product inventories at PC manufacturers. Danely said that he still believes the first half of this year will be strong for PCs, but on the whole, the likelihood of a slowdown in PC sales in the second half of the year “is increasing, and would be negative” due to the fact that PCs represent about 30% of total demand for semiconductors.

Despite what seems like a gloomy take on the chip market, Danely said he was “surprised” to hear that many investors are positive about chip giants Qualcomm (NASDAQ:QCOM) and Intel (NASDAQ:INTC).

According to Danely, Qualcomm (QCOM) is getting attention as it has gained share in the market for mobile phone chips, while Intel (INTC) has an attractive valuation, and is seen as “a hedge against [a] Chinese takeover of Taiwan.” Danely also left his neutral rating on Intel (INTC) unchanged.