By Adam Levine

Stocks of companies that make commodity-grade semiconductors have been rallying since early last week as Wall Street begins to wonder whether a prolonged downturn for the business is ending.

Favorable earnings from Analog Devices on Wednesday morning and an analyst upgrade for STMicroelectronics on Tuesday are only the latest positive data points.

The chip makers are part of a group that makes less advanced chips that go into just about all electronics, from smartphones to vehicles to industrial equipment to cruise missiles. They contrast with chip designers like Nvidia and Apple, who use the most technologically advanced chip-manufacturing processes.

Revenue for companies in the group -- it also includes Texas Instruments, Microchip Technologies, ON Semiconductor, NXP Semiconductors, Aptiv, and Infineon -- has fallen year over year for an average of five consecutive quarters. The group has underperformed the PHLX Semiconductor Index by an average of 122 percentage points over the past two years.

The downturn, which followed a surge of pandemic-related demand, has been one of the longest and deepest down cycles that these companies have experienced. But there may be a turnaround in the offing.

The stocks had risen by an average of about 11% from the close on Feb. 10 through Wednesday afternoon.

"Many of these names were overly punished for the severe cyclical downturn they encountered within their industrial and automotive end markets," Morningstar analyst Brian Colello told Barron's. "We're starting to see optimism that the worst of the downturn is over. Even if we're not fully at the bottom, I think we're close enough to the bottom that investors can see the upturn on the horizon."

Analyst Mark Lipacis of Evercore ISI said he sees signs that an overabundance of chips may turn to shortages in 2025. "I think investors have started to decipher that we're at the bottom of the inventory correction," he told Barron's. "These companies have been lowering expectations for six quarters, and according to our analysis, they are actually in an overcorrection part of the cycle."

According to Jefferies analyst Janardan Menon, investors may have been waiting to buy until the companies had released what was expected to be downbeat financial forecasts for the current quarter.

"Now that the weak guidance from all of them is finished, the market is taking a view that the outlook of the group is now de-risked," he told Barron's. "In such a situation share prices typically don't wait for signs of a recovery in end demand and upgrades to come through. They pre-emptively rally."

Lipacis added, "You know, you make your most money in semis when things go from really bad to just bad."

Write to Adam Levine at adam.levine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 19, 2025 15:37 ET (20:37 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.