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Is the semiconductor industry finally returning to growth mode?

The high volatility witnessed in the performance of semiconductor stocks last year and in the early part of 2019 seems to be easing, if the current trend is any indication. While the general improvement in demand conditions is the main reason behind the recovery, it can also be attributed to the cyclical nature of the industry.

In recent weeks, most of the leading chipmakers performed well at the stock market and the trend gathered momentum in the last few days. Among the top performers, Nvidia (NASDAQ: NVDA) on Thursday registered its biggest intraday gain in recent times, closing the session up 6.5%. A similar movement was visible in the case of Intel (NASDAQ: INTC), Broadcom (NASDAQ: AVGO) and Micron (NASDAQ: MU).

The China Factor

Tech investors got a morale boost from reports indicating a de-escalation of the US-China trade war, with officials on both sides agreeing to hold talks. Riding on the semiconductor push, the S&P 500 and Dow Jones ended the session notably higher. A trade truce will be in the best interest of the companies for which China is a key market, especially Micron, Broadcom and Intel.

Related: NVIDIA Q2 2020 Earnings Conference Call Transcript

There are other geopolitical developments that are favorable to the sector, such as the improvement in the situation in Hong Kong. The positive factors seem to have offset the market’s concerns about the unimpressive US manufacturing data that came earlier.

Data Center Woes

For Intel and Nvidia, the recovery comes as a big relief as they have been hit hard by the slump in data center business. The positive outlook for the data center segment, suggesting a near-term demand recovery, bodes well for the chipmakers.

Worldwide semiconductor sales trend from 2008 to 2018

Adding to the upbeat mood, JP Morgan recently forecast that the demand recovery will gather steam during the remainder of the year, allaying concerns that a potential slowdown in the global economy might derail the revival. The basis of the bullish view is the fast-growing smartphone industry and the emergence of new avenues like 5G, which will require a steady supply of processors in the coming years.

Mixed Outlook

In contrast, most semiconductor firms and some Wall Street analysts have been cautious in their estimates for the fiscal year, due to the prevailing uncertainty with regard to demand growth. A section of market watchers remains skeptical about the recovery prospects, with the main reason being the China-related headwinds and the unfavorable macroeconomic backdrop.

Also see: Intel Q2 2019 Earnings Conference Call Transcript

Nvidia shares made strong gains on Thursday, paring a part of its recent losses, and are once again hovering near the $180-mark. The first week of September has been encouraging for Intel as well, with the stock gaining about 6%. Micron and Broadcom have moved up 8% and 4% respectively since the beginning of the month.

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