A 'broad-based correction' is hitting some chip stocks, and there is more pain to come
jiefeng jiang

Some areas of the semiconductor industry are already in a "broad-based correction," including some of the larger vertical markets, but investment firm Morgan Stanley said the broader industry is not likely to feel the pain until next year.
A team of analysts, led by Joseph Moore, noted that there is likely to be an inventory correction coming to the semiconductor space. There have already been "some pockets of weakness," but the analysts note that the inventory upheaval "is likely to be pervasive, across all markets."
Delving deeper, the team noted that there are demand issues, largely seen in consumer electronics markets, especially in PC gaming and to some extent, console gaming. And there are concerns that the China lockdowns are likely to lead to ongoing supply chain concerns, which could be a positive for the sector. However, there is still negative demand in regions such as Malaysia and the Philippines.
Looking into specific companies, Morgan Stanley noted that Advanced Micro Devices (NASDAQ:AMD) has a strong market share position, but the investment firm cut its estimates on the Lisa Su-led company. However, the firm also noted that AMD (AMD) is on schedule with its Genoa line of products, which should help the company continue to drive market share gains as top rival Intel (NASDAQ:INTC) is seeing delays with its Sapphire Rapids chipsets.
Morgan Stanley lowered its 2022 earnings estimates on AMD (AMD) to $4.02 a share, down from $4.24 a share, and also cut its 2023 estimates to $4.40 a share from $4.72 a share.
"While there is some anxiety about these numbers needing to come down, we note that this is still higher than where our estimates started [2022]," wrote the Morgan Stanley analysts, who added that AMD's (AMD) shares are down 57% this year, which is "in line with names where numbers have already come down materially."
Regarding Qualcomm (NASDAQ:QCOM), which recently said its design win pipeline in its automotive business has risen to $30B from $19B, Morgan Stanley said it is "modestly below consensus" for the fourth quarter and for next year, but the stock's valuation is "very compelling" and the indication is that recent price increases should hold.
GlobalFoundries (NASDAQ:GFS) is likely to continue benefiting from ongoing trade tension, Morgan Stanley said, noting that the foundry shortage has helped provide greater visibility to its customers and GlobalFoundries (GFS) is likely to keep benefiting as it becomes "a partner of choice as it transitions its business model."
Western Digital (WDC) is likely to keep seeing "very soft" NAND trends and the company is expected to lose money in the December quarter, as it is the company with "the most significant challenges" in the near term, Morgan Stanley added.
Microchip Technology (MCHP) is benefiting from the current environment to help deleverage its business and Morgan Stanley sees the company's earnings are performing "in line" with other broad-based companies when the downturn hits. Microchip (MCHP) has been able to generate enough cash during the current period that could put it in a favorable light with investors.
Companies that are heavier spenders, such as Intel (INTC) and Micron Technology (MU), are seen as "inexpensive" on a basis of trailing price-to-earnings and book value, but when it comes to free cash flow, they look more expensive. 
Equipment stocks, such as Lam Research (LRCX) and Applied Materials (AMAT) are likely to see "rougher waters" ahead, but they are also likely to be able to preserve cash flow, even with an expected decline of anywhere between 20% and 25% in wafer fab equipment spending next year. 
Earlier this month, investment firm Stifel started coverage on Advanced Micro Devices (AMD), highlighting the company's strong execution and an "expanding IP portfolio."