Is the Chip Bubble Bursting?
The election bounce has turned into a bull trap as semiconductors get slammed. Here’s why — and a biotech I’m eyeing.
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The election-relief bounce turned into a nasty bull trap on Thursday, and there is a rush for the exits. The SPDR S&P 500 ETF (SPY) is down more than 2%, and the Nasdaq is off more than 3%. The Dow Jones industrial average is showing some relative strength with a 1% loss, but the selling is broad. Only 30% of stocks are higher, and new lows have jumped to more than 400. A day ago, more than 300 stocks were making new highs.
Wednesday’s move was a reflexive reaction to the election, driven by emotion rather than anything fundamental. The election started the move, but it didn’t justify the size of it. Democratic control of Congress doesn’t fix the Iran war or affordability, and the market seems to recognize that now.
The 10-year yield is still near 4.9%, the Bank of England raised rates this morning, and the market still expects the Fed to hike in December. Oil has rebounded after Wednesday’s drop, and that drop was the fuel for the affordability trade.
I wrote last night that I was feeling out of sync with the market, and today’s action shows why. The rotation is shaking out a lot of people, and the moves are too erratic to trade.
Cheap for a Reason
The epicenter is semiconductors. The VanEck Semiconductor ETF (SMH) has been slammed for another 8.5% loss on top of Wednesday’s drop. As of Wednesday’s close, Intel (INTC) was down 51% in a month, Marvell Technology (MRVL) 41%, Micron Technology (MU) 26% and Advanced Micro Devices (AMD) 23%. You can make a strong argument that the chip bubble is bursting.
What has fooled so many people is how cheap these stocks look. Micron traded at about 5.5-times forward earnings in late October, against roughly 19 for the S&P 500. It earned an adjusted $75.52 a share in its latest fiscal year, up from $8.29 the year before. The question is whether those forward estimates are accurate, and the market is saying no.
Semiconductors are cyclical, and cyclical stocks work backward. The price-to-earnings is lowest when earnings are at their peak, because investors are pricing the decline before it shows up. In 2018, Micron fell by roughly half while it was still reporting record earnings. The estimates didn’t come down until the stock had already collapsed.
The customers are the bigger problem. Hyperscaler capital expenditure is chip revenue, and the market is now rewarding the hyperscalers for spending less. When the market cheers the buyers for cutting back, the sellers pay for it. Overnight, Qualcomm (QCOM) and Arm Holdings (ARM) disappointed, and South Korea’s market fell more than 5% and triggered a trading curb.
Demand hasn’t cracked yet, and Nvidia (NVDA) reports on Nov. 17. If it beats and the stock still can’t hold, the market will be confirming that the peak is in. Until then, the low P/Es are a trap.
Xeris Delivers
One piece of good news is Xeris Biopharma (XERS), a longtime favorite of mine, which is up 30%. Third-quarter revenue rose 44% to $107.2 million, ahead of the $101.6 million consensus, and the company raised its outlook for this year. The big headline is that Xeris raised its 2030 total revenue outlook to more than $1 billion from about $750 million.
The driver is Recorlev, a treatment for Cushing’s syndrome, a hormone disorder caused by too much cortisol. Recorlev sales nearly doubled from a year ago, and management now says the drug is on a path to about $1 billion in annual sales three to four years sooner than it expected.
What impresses me most is that the $1 billion outlook still includes no revenue from XP-8121. That’s a once-weekly injection of levothyroxine, the standard thyroid hormone, which Xeris is developing for people with hypothyroidism. The pivotal trial is set to start by year-end, with a launch targeted for 2030. That is upside the new outlook doesn’t count.
Game Plan
My best advice right now is to do your best to protect precious capital and not be in a rush to buy. There are no signs of capitulation yet. The Cboe Volatility Index (VIX) is only around 20, and bottoms usually come with fear. If you want to catch some of these pullbacks, do it slowly and incrementally. Xeris shows that strong stock-specific news still gets rewarded, even in a market like this, and that is where I’ll keep my focus.
At the time of publication, DePorre was long XERS.
