A Mizuho analyst stated that the semiconductor sector faces a critical test this week, with the upcoming developments likely to shape its future trajectory.
The investment bank highlighted several factors, which could potentially impact companies like ASML Holding NV (AS:ASML) ADR (NASDAQ:ASML), Tokyo Electron Ltd. (TYO:8035), BE Semiconductor Industries NV (AS:BESI), ASM International NV (AS:ASMI), and others.
Firstly, Mizuho’s report points out that the U.S. government is considering further restrictions on semiconductor equipment sales to China. This includes non-U.S.-made tools from companies such as ASML and Tokyo Electron.
“US government wants to do anything and everything they can to hurt China domestic advanced semi manufacturing and evolution,” the analyst said.
“No talk of lagging edge equipment restrictions or further export bans for US semi-cap equipment suppliers. This looks and feels like Biden wanting to look tougher against China into election and the DNC next month,” they added.
The restrictions would likely affect ASML significantly, especially given that 49% of their Q2 revenues came from China, albeit not from their EUV equipment.
ASML's recent earnings report, while showing strong Q2 results, provided underwhelming guidance for Q3. Despite beating Q2 expectations, the Q3 outlook fell short, largely due to revenue recognition timing.
"ASML reiterated the prior CY24 and CY25 revenue guides, so the weaker Q3 is pure revenue recognition timing,” the analyst noted. The press on tighter U.S. restrictions into China for semiconductors has overshadowed these results, contributing to a sell-off in the sector.
Moreover, Mizuho reflected on former President Donald Trump's recent comments in a Businessweek interview, which raised concerns about U.S. defense commitments to Taiwan. Trump suggested that Taiwan should pay the U.S. for its defense, a statement that rekindled investor fears regarding Taiwan Semiconductor Manufacturing Company (TSMC) and the broader geopolitical tensions.
“All this does is raise past concerns amongst investors on TSM from China invasion or disruption risk. These concerns were high in 2023, but faded as AI strength and growth has over-shadowed all this geo-political risk,” Mizuho’s analyst commented.
“I think Trump forgets that anything happens to TSM in Taiwan and no one gets a new iPhone or Macbook and new Samsung (KS:005930) / Android handsets also sort of disappear. Might anger the US electorate a bit, right. And US cloud companies get no GPUs or AI silicon either.”
On the flip side, the analyst also highlighted the potential beneficiaries of the U.S. restricting semiconductor equipment sales to China, most notably Intel (NASDAQ:INTC) and Texas Instruments (NASDAQ:TXN) as possible "winners." Despite this, they retain a cautious stance on these names.
“I am not a buyer of either really on any of this, especially INTC. MU [Micron] heavily US based, but down 4% as part of the AI semi unwind.”
Overall, Mizuho stressed that all of the aforementioned factors place a lot more emphasis on how TSMC’s upcoming earnings results and guidance. More importantly, the manufacturer’s commentary on AI, broader foundry market trends, pricing trends, capital expenditure, and non-AI order trends, will be essential.
“How TSM stock trades tomorrow will be critical for the next move in semi sector,” the analyst emphasized. “Anything negative or worrisome accelerates the de-risk trade in my view.”
“And to be honest, the de-risk trade in semis could be much more a factor rotation out of Tech winners YTD and into rate-sensitive laggards.”
The weakness in Nvidia (NASDAQ:NVDA) is particularly telling, as all checks on their fundamentals remain strong, yet the stock has been grinding lower on days when non-tech sectors rally.