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Chip stocks ‘may have seen the bottom’ in October, analyst says

Great Hill Capital Chairman Thomas Hayes joins Yahoo Finance Live to discuss semiconductor demand, chip stocks, and the outlook for the industry despite macro economic headwinds.

Video transcript

[AUDIO LOGO]

RACHELLE AKUFFO: All right, well, staying with the chips conversation, the United States reportedly furthering its crackdown on the Chinese tech sector, and specifically Huawei. Now, this as the likes of AMD and Qualcomm gear up to report quarterly results. Here to discuss the wider sector is Thomas Hayes, Great Hill Capital Chairman and Managing Partner. Good to see you, Thomas. So--

THOMAS HAYES: Great to see you, Rachelle.

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RACHELLE AKUFFO: --a lot to unpack here. Thank you. So as we look at some of the pressures that are in this sector, give us the temperature of what's been happening as we look at this push by US policymakers and the ripple effects.

THOMAS HAYES: Yeah, it's been a strong move. Since October, the US kind of made US chipmakers get a license in order to sell advanced calculations and semiconducting equipment to China. So moving forward, the big news now is that they've gotten the Netherlands and Japan to join on restricting exports of advanced chipmaking equipment.

This is a big deal because ASML focuses on the extreme ultraviolet lithography machines-- they're the only company in the world that makes them-- whereas Japan focuses on the deep ultraviolet light lithography machines. And this will hamstring China's initiative to develop their only-- their own semiconductor business domestically, but it won't completely impair it.

I mean, right now, SMIC, which is the big fab that was developed in 2000 to compete with Taiwan Semiconductor, is producing chips at about 45 nanometers versus Taiwan Semiconductor, though, is producing at 7 nanometers. So I think the big issue that came today is now it's a unified front. It's not just the US unilaterally making these restrictions. It's now the Netherlands and Japan, which are the major suppliers for this advanced machinery.

RACHELLE AKUFFO: And obviously, this is coming at a time where we have a chip glut at the moment. And we're seeing that ripple effect then affecting some of these Asian suppliers as well. What is the outlook then? Because obviously, demand isn't going to be picking up any time soon from some of the estimates that we're looking at. What is the play here for some of these chip companies?

THOMAS HAYES: Well, we may have hit peak inventory. And usually when we hit peak inventory historically, the sector starts to rally in anticipation of it easing. And we may have actually seen the bottom of semiconductors in October. I know that's hard to believe when you saw Intel really not deliver what everyone expected last week. But I think if you look longer term-- and I think we're going to see some more green shoots from AMD tonight and maybe even Qualcomm. Qualcomm is with the handsets, but AMD has the data center. And the PCs has been the most hurt.

The other thing to keep in mind when you see, like, Texas Instruments, the auto industry, the amount of chips that go into each car is accelerating. And there's been two years of pent-up demand for new cars. We do think used cars will do poorly in the next year or two. However, we think new cars with dealer incentives-- and you're already seeing it with Tesla cutting prices, with Ford following suit with their Mach-E-- that demand for chips and capacity is going to shift to auto chip demand.

And with the average car on the road at 13.1 years old, Rachelle, I think the chip sector is going to do just fine reallocating that capacity until the data center, the PC, and the handsets recovers after some pull forward in 2020 and 2021.

RACHELLE AKUFFO: I mean, and as we look at things like handsets, in terms of strategy, we're looking at Samsung. They're actually expecting-- they're actually going to be increasing. They're keeping their capital spending at last year's levels, when you have Micron, Hynix, Kyosho all pulling back on their spending. What's your take on that strategy? What could they potentially be risking by focusing so much on market share that they might end up losing out on profitability?

THOMAS HAYES: Well, I think they're certainly playing the long game. I think you saw the IMF last night come out and say that global growth was going to be better than expected. I think a lot of people really underestimated the impact of China's reopening. The government set 5% reopening targets. The government in China has also been stimulating and easing since March of last year, but it didn't matter.

Until they opened the doors and allowed people to leave their apartments and get back to life, all the stimulus in the world wasn't going to help. Now it's all happening at once. You have nine months of backlogged stimulus, monetary policy easing, coupled with people getting back to life and the pent-up demand. Revenge spending, revenge travel, like we saw in the US from late 2020 to 2021, that's now just starting. And I do think those 5% GDP targets that the government set are going to be very, very conservative.

And we're seeing a lot of banks now come out expecting growth. And what that means for the global economy, a rising tide lifts all boats. The second largest economy in the world is going to grow faster than expected. And that's going to help Europe tremendously, which is why everyone calling for a recession in Europe this winter has been incorrect, in part, number one, the US has stepped up as a natural gas producer. But number two, that China reopening is really helping get things back in gear.

And number three, it's going to help US earnings. And that's a key factor moving forward because the S&P 500, some of the-- a considerable amount of those earnings will benefit from China's reopening as well. So I think things are pointing in the right direction. And I think Samsung might be right to play the long game, pick up share while everyone else is weak. Inventories are peaking. And then when the demand picks up in 12 or 18 months, they've gained share.

RACHELLE AKUFFO: Now, it's interesting because Samsung is expecting the chip recovery to begin in the second half of this year. Are you seeing anything, though, that supports that kind of recovery starting that quickly?

THOMAS HAYES: I do. I see it in the auto sector. So you have seen capacity reallocation. So where there's excess supply in the handsets and the PCs, they've been moving towards auto. And every single company that provides auto chips has been reporting record sales, demand is picking up. And you're seeing it also in the automakers starting to rise because they're finally getting the chips they need to sell cars.

For two years, on the one hand, they had the luxury of selling above sticker, you know, and people would pay whatever they could to get the limited supply. Now the chips are coming in. The semiconductor companies are making a lot of money on the chips. But now the OEMs, the car manufacturers, are putting supply on the lots. They're going to start to do incentives, and you're going to see a massive amount of new cars.

So we do think used cars will do very, very poorly over the next 12 to 24 months. New cars are going to do much better than expected. Everyone's saying in a slowdown, no one's going to buy new cars. But in a 7% interest rate environment, when the dealers start coming out and saying 0% APR, 2.9% APR, you can buy it at sticker or below sticker, I think people, with their 13-year-old cars on average, are going to get out there and take advantage.

RACHELLE AKUFFO: That offer certainly will start looking a lot better. A big thank you there. Thomas Hayes, Great Hill Capital Chairman and Managing Member, thank you so much.