Could declining semiconductor stocks catalyse a tech sector crash?

Semiconductor stocks are deteriorating. According to analysts at Goldman Sachs and Stifel, the area is under extreme pressure as some worry that supply and pricing problems will worsen in 2019.

The decline follows a period of nine quarters of growth. However, Goldman Sachs’ Mark Delaney predicts that the downturn will less severe than previous industry slowdowns.

Why are semiconductors crucial to the tech sector?

Semiconductors, or memory chips, are integral to everyday electronics. Compound semiconductors control electrical currents at the centre of devices such as GPS and smartphones.

Compound semiconductors can store, transmit and detect data, emit and sense light, and generate microwaves – making them a crucial element of all smart devices. The power amplifying tool also has a host of properties that allows emerging technologies to operate efficiently.

Troubled stocks

"Memory downturns usually last for several quarters and can see an acceleration in price declines, as customers delay procurement to wait for lower prices when possible, causing a effect," Mark Delaney wrote. "That can lead downturns to be worse than initially anticipated by investors."

In a separate note, Goldman analyst Toshiya Hari reiterated Delaney's concerns. Hari reduced semiconductor capital equipment stocks from attractive to neutral due to concerns of an oversupplied market.

The nitty gritty

Micron Technology Inc. fell by almost 6% following Delaney's decision to cut the stock rating to neutral, reducing the price target from $68 to just $50. Western Digital also suffered a drop to $63 to $80, followed by Seagate's slash to $39 from $44.

Analysts including Hari cut stock ratings of LamResearch, SK Hynix Inc., and Tokyo Electron Ltd. from buy to neutral. In addition, the team eliminated Entegris Inc., Samsung Electronics and Sumco Corp. from Goldman’s conviction list.

As a result, LamResearch's stock trading fell 3.9% at $150.5 on Wednesday morning. The shares are now down by over 35% from the 52-week high.

How could a semiconductor decline impact the industry?

Semiconductors enable devices to operate. If semiconductor stocks continue to decline, the whole tech industry could suffer as a result.

The consequences could be devastating. Stifel analyst Tore Svanberg said that tariff-related uncertainties, below-seasonal industry growth trends and rising interest rates could also damage the semiconductor market.

Back in June, the UK government met to discuss ways to capitalise on international opportunities for the Wales Compound Semiconductor sector. However, as the market currently stands, there may not be any future opportunities to seize.