Thesis Semiconductor Market

In our view, undemanding valuations could limit near-term downside if our demand-side thesis takes longer to play out, while the potential for trough margins to surprise to the upside during this correction creates compelling risk/reward propositions in high-quality semiconductor stocks.

Industry heavyweight Samsung Electronics demonstrated these improving competitive dynamics when it responded to the recent slide in memory prices by scaling back its planned capital expenditures for 2019.

Significant consolidation has also occurred among providers of semiconductor capital equipment, while the number of high‑quality analog chipmakers has halved relative to a few years ago.

As of September 30, 2018, semiconductor stocks were trading at their lowest valuations in five years and were closer to levels seen during a severe, cycle-ending contraction.

Our outlook calls for a midcycle correction moderated by several years of industry consolidation and secular growth trends, not a bear market collapse.

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