THE strong rally in global technology stocks faltered last week. The Nasdaq Composite Index and the STOXX Europe 600 Technology Index, which hit 52-week record highs on March 20, fell with a thump.
At the close of trade on Wednesday, the Nasdaq declined 2.37% from the previous day, one of the steepest falls over a year. On Thursday, the Nasdaq slipped further by 0.27% to end at 4,863.36 points. In Europe, the STOXX Europe 600 Technology followed the trajectory of the Nasdaq, falling 4.45% by the end of Thursday to 473.76 points.
The selling on semiconductor counters, which were once well liked as a proxy to the exponential growth of smartphone and tablets, was rather heavy.
In the US, Nvidia Corp fell 6.07% on Wednesday before slipping another 0.36% to end at US$20.965 on Thursday. Meanwhile, Micron Technology Inc slid nearly 5% on Wednesday before gaining a marginal 0.34% to US$26.66 on Thursday.
Stocks on the European bourses fared equally badly. Semiconductor giant Infineon Technologies AG slipped 4.2% over two consecutive days to end at €10.813 on Thursday while STMicroelectronics NV fell 8% from €8.994 on Tuesday to close at €8.278 on Thursday.
International news reports suggest that the global selldown was sparked by concerns about the growth prospects and valuations of the semiconductor industry.
Some quarters says the selldown can be attributed to the decline in orders for durable goods —products like computers that are designed to last at least three years — in the US. Orders were down 1.4% in February from the previous month. In addition, there are also concerns about how the stronger US dollar will affect sales of the US chip makers.
In tandem
The local semiconductor companies have been impacted by the current selldown as they form part of the supply chain. The bullish sentiment had spilled over to Bursa Malaysia, with local semiconductor companies enjoying a strong rally since 2013.
Globetronics Technology Bhd fell 4.86% on Thursday after hitting a high of RM5.55 on Monday. The stock has made a quantum leap since early 2012, when it was trading at less than RM1 per share. Meanwhile, Inari Amertron Bhd slid 5.01% on Thursday, closing at RM3.22 after hitting a five-year high of RM3.39 a day earlier. Inari is another star performer in the local semiconductor industry, with its share price rocketing from barely 40 sen in early 2013 to RM3.25 last Friday.
Notably, Malaysian Pacific Industries Bhd (MPI) only fell 0.87% to RM6.84 while Unisem (M) Bhd closed unchanged at RM2.10 on Thursday.
AllianceDBS Research analyst Toh Woo Kim says the decline in technology counters has not come as a surprise. He points out that the stocks had seen similar volatility last October due to earnings warnings in the US. But the stocks rebounded quickly thereafter, implying that it could have been a sentiment-driven selldown.
An analyst with a bank-backed research house says the fact that the share price of these technology stocks have been rising over the past few years could mean that it is time for some investors to take profit.
“Malaysia’s technology stocks have done well over the last year. Share prices have gone up and, similarly, price earnings ratios (PERs). It is possible to see a correction in the share prices,” concurs TA Investment chief investment officer Choo Swee Kee.
He notes that the PER for the local technology stocks are comparable with their regional peers and they are no longer cheap in terms of valuation.
“We have invested in technology stocks, but for now, we are holding them. We will trade them if we think it is a good time to take profit,” says TA’s Choo.
Meanwhile, AllianceDBS’ Toh says the PERs of the semiconductor companies are close to their historical highs.
Globetronics is trading at a trailing 12-month PER of 23.04 times while Inari is trading at 17.88 times. MPI and Unisem, which have been deemed as laggards in the industry, are now trading at 21.52 times and 20.69 times PER respectively.
Nevertheless, analysts believe that the fundamentals of these companies are intact as global semiconductor sales have been strong. The selling pressure could be attributable to profit-taking activities.
Statistics from the Semiconductor Industry Association (SIA) show that the global semiconductor industry posted record sales of US$335.8 billion in 2014, an increase of 9.9% from the previous year. According to SIA, it was the second consecutive year of record sales.
Toh says the stronger US dollar will not affect the transactions made between the industry players and its US-based counterparts as the products are generally sold in US dollar. But, the reduction in sales of technology-related end-products could reduce demand for semiconductor and other similar products.
“Fundamentals don’t change overnight. We would have already downgraded the stocks under our coverage if there had been any fundamental issues,” says the analyst with the bank-banked research house.
HL Research says in a recent report that the global industry — based on what was said at a recent electronic and electrical technology forum — is expected to grow at a rate of 3% to 12%. It adds that the International Data Corporation reported in March that worldwide volume of smartphone shipment reached 1.3 billion units in 2014, a 27.7% increase from the previous year.
“By 2019, this is forecast to reach 1.96 billion units, at a five-year compound annual growth rate of 8.5%. This bodes perfectly well for Inari, which has direct exposure to the smartphone market,” HL Research writes.
Going forward, Toh says the local semiconductor industry is likely to track the US’ until the release of the former’s quarterly results.
This article first appeared in Capital, The Edge Malaysia Weekly, on March 30 - April 5, 2015.
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