Investing.com -- Citi analysts see potential downside risks for semiconductor stocks as the chip sector faces mounting challenges from multiple end markets.
In its third-quarter 2024 earnings preview released Wednesday, Citi’s team highlighted cooling demand in the PC and wireless segments, which together account for 38% of semiconductor demand.
This slowdown is being compounded by worsening conditions in the automotive end market, which makes up 14% of the semiconductor market.
The Wall Street firm expects aggregate consensus estimates to decline during the Q3 earnings season “as strength in the AI, data center, and communications end markets are being offset" by the slowdown. Citi’s estimates for Q4 2024 are around 10% below consensus.
Still, the AI sector remains a bright spot, with AI-related demand still robust.
Citi expects AMD (NASDAQ:AMD), one of the key AI players, to raise its AI sales forecast from $4.5 billion to over $5 billion for 2024.
Furthermore, demand in traditional servers and communications end markets is also improving, with Citi analysts highlighting a recovery in spending in the former and “inventory replenishment” in the latter.
Meanwhile, PC demand, which accounts for 21% of semiconductor demand, “is cooling and could be a mild headwind for PC-exposed companies such as Intel (NASDAQ:INTC) and AMD,” analysts caution.
“There is also excess inventory in the handset end market (17% of semi demand),” they added, which could impact companies such as Qualcomm (NASDAQ:QCOM).
In light of all this, Citi analysts reduced their estimates on Qualcomm and launched a negative catalyst on the stock “given our expectations of lowered forecast in addition to Apple (NASDAQ:AAPL) going away beginning in 2025.”
They also cut estimates for Texas Instruments (NASDAQ:TXN), Microchip Technology (NASDAQ:MCHP), and ON Semiconductor Corporation (NASDAQ:ON) due to auto end market weakness.
In broader terms, considering that the SOX index has climbed 20% in six weeks, Citi expects a sell-off during the earnings period, before the index recovers toward the end of the year when attention turns to 2025.
Meanwhile, Analog Devices (NASDAQ:ADI) remains Citi’s top pick in the semiconductor sector. Other Buy-rated names include AMD, Broadcom (NASDAQ:AVGO), Micron (NASDAQ:MU), Microchip, and Texas Instruments.