Goldman Sachs Sees 15%-20% Downside Potential in Semis (ADI) AVGO) (MXIM) (NXPI) (ONNN) (TXN)

In a research note earlier, Goldman Sachs analyst James Covello reiterated his cautious view on semiconductor stocks. Comments follow Microchip Technology's (NASDAQ: MCHP) warning yesterday.

"For context, the last time Microchip negatively preannounced was October 15, 2012 (3% sales miss). Between October 1 and December 31, Street 2013 sales estimates for the Semi group were revised down 6% on average and Street EPS estimates were revised down 13% (Exhibit 1). Microchip also negatively preannounced on Jan 6, 2009 (18% sales miss)," said analyst James Covello.

"We downgraded our Semi coverage view to Cautious on August 18 based on signs that the cycle was overheating, and recent datapoints underscore our concerns. Specifically: 1) our end market analysis shows semi revenue growth outpacing end market growth for the last several quarters, which we believe is unsustainable. In industrial and auto specifically, we believe semis are over-shipping by 10-15%. 2) Our trendline shows semi units shipping roughly 4% above normalized demand in 3Q14, and we recommend investors sell the stocks when semi shipments are above trend. 3) Supply chain inventory dollars were up 3% qoq in 2Q14 and are 3% above the 3-year average. At auto system suppliers, inventory is now 7% above the 3-year average. The SOX has corrected 8% to 603 (10/9 close) since peaking at 657 on Sept 18. Based on the magnitude of corrections in prior cycles we see 15%-20% further downside from current levels," he added.

Covello said stocks with similar end market exposure to Microchip include Analog Devices (NASDAQ: ADI), Atmel Corp (NASDAQ: ATML), Avago Tech (NASDAQ: AVGO), FREESCALE SEMICONDUCTOR, LTD., (NYSE: FSL), Linear Technology Corp. (NASDAQ: LLTC), Maxim Integrated Products (NASDAQ: MXIM), NXP Semiconductors (NASDAQ: NXPI), ON Semiconductor (NASDAQ: ONNN), Texas Instruments (NASDAQ: TXN), and Semtech Corp (NASDAQ: SMTC).

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