Are Chipmakers Overinvested? Gauging the Market with Micron Technologies (MU) and Standard Microsystems (SMSC)

Earlier this month the Semiconductor Industry Association nearly tripled its sales forecast and chipmakers got a nice boost on Wall Street.

On June 10, the association predicted that global microchip sales will rise 28 percent due to increasing demand in China and India. Around the same time, Texas Instruments (NYSE: TXN) and National Semiconductor (NYSE: NSM) raised earnings projections. Based on the swing in options from puts to calls, analysts speculated that the group was overinvested and could be primed for a pullback. Sure enough, the rally peaked about a week later and prices fell, over 7 percent in the case of the Semiconductors Holdrs Trust (SMH).

Other analysts say demand is solid for the rest of the year and chipmakers still look attractive. Where does the narrative go from here? In short, is the rally over?

Let’s see how chipmakers Micron Technologies (MU) and Standard Microsystems (SMSC) fare after reporting earnings today to gauge where the market may go from here. Then look at Semiconductors Holders Trust for further analysis.

Micron Technologies (NASDAQ: MU)

MU blew estimates out of the water today with a $0.92 EPS for its third quarter, far exceeding analysts estimates of $0.43 and year-ago EPS of – $0.36 for the same period. Last quarter the company reported $0.39 EPS.

Revenues jumped almost 107 percent from a year ago and the company benefited from an increase in average selling prices. Its acquisition of Numonyx during the quarter, a Swiss memory technology company, added significantly to the bottom line with a $437 million gain.

Net sales, however, more than doubled from the year-ago quarter and gross margins improved as well. Without the gain from the Numonyx acquisition, profit still improved by more than 37 percent.

MU shares moved higher during the day, but gave up the 5 percent gain after the earnings announcement after the bell.

Comments: With a PE multiple of over 61, investors were wise to sell on the news. Still, the growth story at MU is real and the fundamentals are solid, but the stock looks overvalued at current levels. Technical indicators show the stock is oversold and trading above its moving average on higher volume, signaling a buying opportunity. Still, the stock was not able to break above $10.10 today on a great news day. It looks like much of the upside has already been wrung out of the stock for now, but still one to watch for a buy on a dip.

Standard Microsystems (NASDAQ: SMSC)

SMSC also beat analyst expectations today, beating consensus estimates of $0.27 by $0.06 for $0.33 EPS (non GAAP) for the first quarter. Last year, the company reported negative earnings of $0.15 per share for the same period. Revenues rose almost 56 percent from the year-ago quarter.

On a GAAP basis, the company reported $0.03 per diluted share compared to a $0.42 loss for the prior-year period.

The company predicted non-GAAP earnings per diluted share in the range of $0.40- $0.44 for the next quarter.

Comments: SMSC is up over 5 percent after the earnings announcement in after-hours trading after giving up almost 1 percent at the close. The company has a reasonable PE at about 13 time earnings, is rated a buy, and has good growth prospects. Not a high-flyer like MU, but probably a better bet based on current valuations.

Semiconductors Holders Trust ETF (AMEX: SMH)

SMH ended the day slightly higher but fell a lesser amount in extended trading after the bell. For this year, this fund is up over 31 percent. The fund comprises twenty semiconductor companies, including Intel (INTC), Texas Instruments (TXN), and Applied Materials (AMAT), among others. Chipmakers Intel and Novellus (NVLS) report in July.

Comments: For the prior 12 months, SMH gained 27.4 percent compared to the NASDAQ composite, which gained 22.3 percent. Despite the fact that the broader market seems unable to sustain a rally, the shares have lots of room to the upside when the market rebounds.

Disclosure: No positions.

The Wall St. Cheat Sheet Premium newsletter has delivered 15/16 winning picks since inception in November 2008. Let the Hoffman Brothers give you their best investing and trading ideas: click here now for your free trial.