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Chip stocks hit by emerging bearish view

SAN FRANCISCO (MarketWatch) -- Semiconductor stocks headed south Monday as a bearish view emerged on the sector, with analysts citing signs of weaker demand and bracing for grim results from the upcoming earnings season.

The Philadelphia Semiconductor Index (SOX) lost 1.2%, leading the tech sector retreat which saw the Nasdaq Composite Index (COMP) slipping by a fraction to close at 2,932. The Philadelphia Index has shed about 11% in the last three months -- giving up most of the gains made for the year.

"As we approach June quarter earnings season, we believe semiconductor demand has softened almost across the board," J.P. Morgan analyst Christopher Danely wrote in a note to clients on Monday.

The sentiment is weighing on the biggest names on the sector, with Advanced Micro Devices Inc. (AMD) giving up 2.3% to close at $5.62, and holding onto modest single-digit gain for the year-to-date. Most major chip shares have lost ground in the last three months, with companies like AMD, Texas Instruments(TXN) and SanDisk Corp.(SNDK) posting double-digit declines.

Intel Corp. shares (INTC) rebounded later in the day, eking out a 0.1% gain to close at $26.17.

Sterne Agee's Vijay Rakesh said in a note Monday that "semis are shaping up for a lackluster earnings season." The uncertainty in Europe and the lingering weakness in the personal computer market are seen as key factors for a more muted outlook for the second half of the year.

A clearer view should emerge next week when Intel, the world's biggest semiconductor company, reports second quarter results on Tuesday, July 17, as the tech earnings season kicks off.

Williams Financial analyst Cody Acree noted that while Intel has yet to revise its fiscal year 2012 outlook, he expects the chip giant to offer a less upbeat forecast.

"We believe a downward revision is likely to be announced during its upcoming earnings call, " he wrote in a note on Monday, "We do believe a negative revision and discussion of slowing growth may cause a round of material profit taking."

Acree also said that "over the past few months, we have seen negative data points from the PC food chain continue to build, to the point that the broad consensus is extremely cautious regarding the potential for any material growth this year."

The corporate market is still considered a bright spot, with the growing demand for new data center technology, particularly for networking gear.

"The communications/networking market seems to be the only strengthening sector as wireless infrastructure deployments begin to grow," FBR Capital analyst Craig Berger said in a note.

This is good news for such companies as Broadcom Corp.(BRCM) , Berger said.

There had been some optimism stemming from the upcoming roll out of new products, including a new iPhone from Apple Inc. (AAPL) and new versions of the Intel-designed Ultrabooks based on Microsoft Corp.'s (MSFT) Widows 8 operating system.

But Danely of J.P. Morgan also noted that "demand from the PC end market appears weakest as a slew of companies throughout the PC food chain have lowered guidance recently for both the second quarter and the third quarter."

And for the broader chip sector, the wobbly global economy remains the wild card.

"It's all macro -- just like last year, and the year before, and the year before," Danely added. "We believe the macroeconomic environment will be the biggest driver of semiconductor stock performance during 2012, just as it was in 2011, and 2010 and 2009."