Banks warn chip sector facing greater headwinds

Yahoo Finance’s Daniel Howley joins the Live show to discuss the chip sector, the impact of a macroeconomic slowdown, and Morgan Stanley lowering its price target on AMD to $95 from $102.

Video transcript

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BRAD SMITH: Welcome back to "Yahoo Finance," everyone. The chip sector outpaced market declines yesterday and are still mostly lower this morning. A new note coming from Morgan Stanley makes the case that greater headwinds are still ahead for semiconductors due to a slowdown in macroeconomic conditions expected to leave a big impact throughout the next year.

Morgan Stanley also lowered its price target on AMD to $95 from $102. For more on this, let's bring in "Yahoo Finance's" own Dan Howley. Dan, when we think about some of the issues that are really getting weaved into the warnings now coming from banks in the broader semiconductor space, you know what really sticks out to you as of right now?

DAN HOWLEY: Yeah, I think from this note at least the big thing that stuck out to me was the Industrial scale parts of the chip industry. So think the bigger companies that are going to be purchasing, or normally would be purchasing chips to fill out servers and things along those lines, that's something that they said would eventually be impacted.

Now they said that the fact that we're seeing the economy kind of go south is slightly hurting these stocks. Let me just throw this out there. I'd say it's a lot more than that, because if you look at prices year-to-date, we're looking at the likes of Intel down nearly 50%, AMD down nearly more than 50%, Nvidia down nearly 60%.

So they're all getting shellacked pretty badly here, but now they're saying into 2023 we're going to see them hurt even more as these kind of macroeconomic conditions really start to lay into these companies. So just outside of the larger issue of big name companies buying servers, buying chips for servers and video cards for servers, you have to look at the consumer side of things as well.

And we've already said numerous times that the PC market is just falling flat now from the highs that it had seen. We had Nvidia obviously announced some new chips this past week, pricing for those is very high compared to prior versions of those chips. And at least anecdotally from what I've seen online, a lot of gamers aren't talking about trying to scoop them up right away because of those high prices.

Intel is expected to unveil their 13th generation chip this next week, at its Intel Innovate conference. We have AMD obviously talking about their own chips. All of these companies though are running into issues in the same way. The consumers just don't want to buy right now and that will likely continue for the foreseeable future as people decide, look, I can't spend the money on this expensive smartphone.

I can't spend the money on this expensive laptop or desktop. I have to hold on for now. And so it's not looking good for these chip companies going forward.

JULIE HYMAN: Yeah, and we were talking in our morning meeting, we're going to be talking to the head of the automotive business at Qualcomm a little bit later in the show, Dan. And I think you made some good distinctions there, because it's not as though these issues are necessarily occurring across the board for different--

We sort of have to look at different types of chips and what's happening with the different types of chips. As you said the PC demand for chips probably is the most acute area of pain, I would say, for the chip makers. And but they're still focusing on growth businesses like automotive for example, like AI for example. So can you talk to us a little bit about that differentiation?

DAN HOWLEY: Yeah, and that's a really, really good point. The fact that AI is still going to be a place where a lot of companies are investing. It's still, I mean, you could still call it a relatively nascent technology, just because the point that we're at with AI, it's basically a toddler trying to learn how to walk, maybe even crawl at this point.

It's nowhere near where it's expected to go. So a lot of companies are continuing to invest in it just for the sheer fact that it can help them better streamline their own business practices. And I think that's going to see-- be something that we'll continue to see moving forward.

And then as you said, obviously, the car industry is a place we're going to continue to see heavy investment. Outside of the issue with chip shortages that continue to hurt the chip industry. There's still a number of factories and plants that have cars idling outside or at least not idling, parked.

It'd be a huge waste of gas, but they're parked outside lots just kind of sitting there, waiting for components. But we will continue to see companies push the envelope when it comes to adding more and more chips to their cars. And that should help companies in that space.

We're talking about obviously the Qualcomm's, the Nvidia's, even the companies that license software. So think maybe Google, which is working with some automakers, as well as Microsoft. So it could help them in that area. And look, electric cars, obviously, that's the big thing that everybody talks about.

But part of the electric car equation is also the self-driving car equation. We're still decades away from actual self-driving cars, but we are seeing the technologies improve. And every time a new technology gets put into a car, it needs a processor.

JULIE HYMAN: Yes, good point. And they're going to need a lot more of them coming up as well, which is what a lot of the chip companies are banking on. Thanks, Dan. Appreciate it.