China 'Increasingly A Risk': Analyst Previews Semiconductor Stocks Ahead Of Earnings

As the global semiconductor industry braces for fourth-quarter earnings, Bank of America analyst Vivek Arya has sounded the alarm on China's growing trailing-edge capability and intensifying competition in low-end/non-core markets. Arya's concerns, outlined in a recent note, highlight the potential risks and opportunities for semiconductor companies with significant exposure to the Chinese market.

China's growing trailing-edge capability, Arya warns, could lead to intensifying competition in low-end/non-core markets, potentially driving down pricing. This emerging risk, coupled with geopolitical tensions and potential trade wars, could force a reset of earnings estimates for semiconductor companies. For instance, Texas Instruments (TXN), with relatively high China exposure (20% of sales), is using aggressive pricing to preserve market share.



Arya also expects a "rotation into cyclicals" during the second half of 2025, which could benefit semiconductor companies with significant exposure to the automotive and industrial sectors. Companies like NXP Semiconductors (NXPI), ON Semiconductor (ON), and Analog Devices (ADI) are well-positioned to capitalize on the recovery in these cyclical sectors.

NXP, with strong margins, relatively low market valuation, and fast growth, is expected to endure a "shallower" downcycle than its peers. ON, with a significant presence in the automotive market, is expected to report strong revenue growth in the fourth quarter. ADI, with a differentiated precision analog portfolio, could support a turnaround in the second half of the year as the industrial sector recovers.

Investors looking to capitalize on the expected rotation into cyclicals may want to focus on semiconductor companies with significant exposure to the automotive and industrial sectors. Companies like NXP, ON, and ADI could be attractive investment opportunities, given their strong fundamentals and well-positioned portfolios.

However, investors must remain vigilant to the potential risks posed by China's growing trailing-edge capability and geopolitical tensions. As Arya's note underscores, the semiconductor industry is at a critical juncture, with both risks and opportunities on the horizon. By staying informed and monitoring the performance of these companies, investors can adjust their portfolios accordingly and position themselves for success in the coming years.

Rating: Neutral, with a focus on companies with significant exposure to the automotive and industrial sectors.