UBS analysts said in a research note Monday that it has identified that semiconductor stocks, excluding AMD (NASDAQ:AMD) and NVIDIA (NVDA), are currently oversold in some areas, suggesting potential opportunities for investors.
According to the investment bank, "Price momentum of semis becoming oversold in parts" indicates that these stocks, relative to the market, have shifted from being significantly overbought to "clearly oversold."
This is said to mark a notable change, as semis had previously experienced a surge, reaching levels "4.3 std overbought," similar to the TMT period peak.
"In our experience, structural growth stories in a bull market tend not to get very oversold. If we exclude AMD and Nvidia (NASDAQ:NVDA), then semis are clearly oversold on this basis," said UBS.
Despite this oversold condition, UBS highlights several ongoing concerns within the semiconductor sector. One of the main worries is the potential pressure on "relative earnings momentum."
While semis have outperformed the market in earnings over the past year, UBS says recent trends suggest that this momentum may be faltering.
Furthermore, the bank points out that semis "do not look cheap yet" despite the recent pullback.
The sector's price-to-sales ratio remains "2.6 std above its norm," and while price-to-earnings (P/E) ratios appear slightly cheaper, they are still about "c1 std above their norm."
UBS identifies the sector's heavy reliance on China as another downside risk.
With China accounting for "20% of revenue" and "roughly 30% of profits," the economic slowdown and deflationary pressures in the country could have a significant impact on the semiconductor market.
Finally, UBS's crowding data reveals that investors remain "long this sector," which could amplify the volatility in semis going forward. Despite the oversold conditions, these various concerns suggest that investors should approach the sector with caution.