In this market turmoil, high-end chip stocks have suffered heavy losses. Citigroup believes that there is no need to panic about the sharp decline, and that now is a good time to buy as the AI and memory markets have strong demand.

In Citigroup's semiconductor industry report on August 8th, it was pointed out that although chip stocks suffered a sharp decline in the second quarter of 2024, this was mainly due to macroeconomic factors and high expectations:

Due to the negative performance of companies such as Intel, Microchip Technology and NXP Semiconductors, it is widely expected that earnings will decline by 11% this quarter, with average EPS down about 5% on a quarter-over-quarter basis. In addition, the restocking of simulation chips did not happen as quickly as expected and the risk in the automotive terminal market (which accounts for 14% of semiconductor demand) is increasing.

Despite the poor performance of some companies, Citigroup remains bullish on the semiconductor market, mainly because the demand for AI and storage markets is still strong:

Due to reduced production capacity, the price of DRAM in the third quarter is better than expected, and the upward trend in prices is expected to continue. Micron Technology is our top pick, and we believe it is time to double down now.

Selling off is the result of macro factors and high expectations.

Citigroup believes that this selloff is the result of a combination of macro factors, high expectations in the semiconductor industry, and disappointing performance:

• Expectations are too high: the price-to-earnings ratio of the US semiconductor index (SOX) is 37 times, a premium of 70% to the S&P 500, the highest level since 2008.
• Disappointing performance: consensus EPS expectations are down 11%, mainly due to the poor performance of Intel, Microchip Technology, and NXP Semiconductors. Due to restructuring, ASML did not meet expectations, and Intel cut its capital expenditures by 25% in 2025.

• Restocking of simulation chips has not happened yet: except for Texas Instruments, expected sales of other simulation companies have been downgraded.

• Weak demand continues for industrial and automotive terminal markets: sales in the automotive terminal market have only dropped by 13% from the peak, far below the 30-40% decline in the industrial terminal market. We believe that sales in the industrial terminal market are bottoming out, but the decline in the automotive terminal market may be even greater.

Strong demand for AI and storage markets.

Nevertheless, Citigroup remains optimistic about the semiconductor sector, especially as demand for AI and storage markets remains strong, stating in their report:

1. AI and storage market demand is still strong: the fundamentals of the AI and storage markets, which account for 30% of semiconductor demand, are still strong. AI capital expenditures are increasing, and Meta and Microsoft will see significant increases in capital expenditures in 2025; it appears that DRAM prices will rise by about 15% in the third quarter of 2024, higher than the low double-digit growth expected. The DRAM market continues to improve, and we expect DRAM prices to increase by 62% year-on-year in 2024. This is due to limited supply growth and memory manufacturers allocating capacity to HBM. We expect Micron Technology to provide upward guidance when it releases earnings in September.

2. Stable demand in the PC, data center, and mobile phone markets: although the automotive/industrial terminal markets still seem weak, the demand trends for the three major terminal markets of PC, mobile phone, and server (which together account for 61% of semiconductor demand) are relatively healthy. Micron Technology stated that inventories in the traditional data center market improved in the first half of the year and are expected to grow in the second half of the year. During AMD's second quarter earnings call, they saw healthy demand signals for general computing from client and server businesses. According to comments from Texas Instruments, STMicroelectronics and NXP Semiconductors, the communication infrastructure terminal market (which accounts for 4% of semiconductor demand) appears to be rebounding from its lows.

Citigroup expects semiconductor sales to grow by 14% in 2024, with revenue reaching $603.2 billion. Outbound volume is expected to increase by 3% year-on-year, and average selling prices are expected to increase by 13% year-on-year.

In addition, Citigroup pointed out that given the recent selloff, it is time to double down on Micron Technology and other companies, citing tight supply in the DRAM market due to monopolies.