Citi warns these key tech stocks are facing their worst downturn since the dotcom bust - and that's a red flag for the global economy
- Citi has warned struggling semiconductor stocks are set to fall further as the global economy worsens.
- The Philadelphia Semiconductor Index has lost 27% this year, while Nvidia and Micron warned on revenue outlook.
Semiconductor stocks are headed for a prolonged downturn as recession risks pile up, Citigroup has warned.
The bank's gloomy forecast comes after Nvidia and Micron Technology, key names in the sector, saw their share prices tumble this week after they warned about the outlook for revenue.
Semiconductor companies are seen as an important bellwether for the health of the global economy, because the chips they manufacture are key components in cars, computers, and mobile phones.
Stocks in the sector have struggled in 2022, with the Philadelphia Semiconductor Index (SOX) plummeting over 27% year-to-date — and Citi doesn't expect the sell-off to end any time soon.
"We continue to believe we are entering the worst semiconductor downturn in at least a decade, and possibly since 2001," analyst Christopher Danely said in a recent research note. "We expect every company in our coverage universe and every end-market to experience a correction."
Citi believes upcoming data on PC and mobile phones will show a further weakening, and that updates on datacenters, autos and industrial chip use will be similarly negative.
A comparable downturn to that in 2001 would see the SOX lose half of its current value. The index crashed by 79.6% between March 2000 and September that year, as the dotcom bubble burst.
Nvidia has fallen 10.1% to below $171 a share after the chip maker warned Monday of a revenue slowdown and a softening in gaming demand. Meanwhile, Micron's stock has slipped 8.9% since it reported a decline in demand for its chips and warned of a challenging market environment.
Micron chief executive Sanjay Mehrotra said that slowing economic growth would weaken chip demand in "parts of the market including data centers, industrial and automotive," speaking in an interview with Bloomberg TV earlier this week.
Mehrotra's warning reflects the rising likelihood of a recession and means that there will likely be further pain ahead for chip makers, according to Danely.
"Micron is the first company to mention weakness in the automotive and industrial end markets, and we would note Micron has been a leading indicator in the downturn all year," Danely said.
Chip sales growth has now decelerated six months in a row - and there's a strong correlation between that data and the performance of the global economy, according to the Semiconductor Industry Association.
Chips' crucial role in the manufacturing of technology including cars, computers, and mobile phones means they offer significant insight into global aggregate demand.