Chip stocks, which are underperforming the markets by a wide margin this year, are trading in the green in US premarket price action today after Samsung predicted better than expected revenues for the second quarter.

The South Korean giant forecast that second-quarter sales would rise 22% YoY while operating profit would rise 12%. While the sales guidance was better than expected, the operating profit guidance trailed analysts’ estimates. Also, it would be the slowest operating profit growth for Samsung in two years.

Samsung’s guidance triggered a rally in Asian chip shares including TSMC. In the US, all chip stocks like Nvidia, Intel, and Micron are trading higher in the pre-market price action today.

Samsung’s commentary is a welcome break for chip stocks. The sector received a jolt when Micron released its earnings last week and warned of a slowdown. Micron predicted a 5% fall in global smartphone sales and a 10% rise in global PC sales.

Research firm Gartner has also lowered its forecast for global PC sales and now expects them to fall 9.5% this year. The research firm expects smartphone sales to fall 7.5% this year which is worse than the 5% fall that Micron expects. Previously, Intel has also talked about a slowdown in chip demand.

The global chip shortage has taken a toll on global automotive sales. While Ford’s deliveries rose sharply in June, they are still down YoY in the first half of the year. Ford stock fell to a multi-month low after releasing its June delivery report.

Chip Stocks Are Bouncing Today: Analysts Pick Stocks to Buy

Global recession fears have been taking a toll on chip stocks. The Federal Reserve’s rate hikes haven’t helped matters and names like Nvidia, which trade at a significant premium to peers, have seen a severe contraction of their trading multiples.

The market sentiments toward chip stocks have been quite tepid as most analysts fear gadget sales to fall this year after two years of strong growth. The sales boost of 2020-2021 was also due to the demand-pull forward. Also, rising inflation and economic uncertainty are leading to a fall in sales of discretionary products.

Nomura also believes that investors can shun most chip stocks for now. It however listed Samsung as buy-rated stock along with Soulbrain and SK Hynix. Deutsche Bank finds Broadcom as a safe bet in the chip space.

The brokerage is also bullish on Amazon. Yesterday, Amazon announced a deal with GrubHub and would offer it as a bundle to its Prime members. The announcement triggered a sell-off in both Uber and DoorDash as markets fear that they may lose on food deliveries given Prime’s massive subscriber base in the US.

Samsung Earnings Were Not as Bad as Expected

Coming back to Samsung’s guidance, it was not as bad as feared especially as analysts have toned down their expectations from the sector after Micron’s grim warning. However, other data points reflect the pain in the chip industry which now seems to be transitioning from supply shortfall to oversupply. Chip inventories in South Korea have climbed in recent months.

However, the chips for the automotive industry are still in short supply. General Motors could not deliver thousand of cars to dealers in the second quarter due to chip shortage. Meanwhile, both Ford and General Motors have gained market share in the US as Toyota’s chip woes are even worse.

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