Tech sector likely to face margin erosion, analyst warns

Rising operation costs might drag the sector down, according to RHB.

Despite undergoing a correction of 50% to 70%, tech stocks cannot be fully considered a haven asset yet, according to RHB.

In a report, the analyst said the tech sector might face margin erosion in the near future on the back of higher operating costs.

What will determine a tech company’s earnings resilience against its peers will be its ability to pass on the cost to consumers, said RHB.

RHB also warned of a potential slowdown in the chip sector, citing Micron Technology’s recent weak outlook forecast as an indicator.

TSMC’s plan to trim spending on expansions by as much as 9% and delay some capex spending to 2023 despite surging revenues also serves as a sign that there are concerns in the industry, said RHB.

“The memory chip firm is now shifting to a more conservative posture on adding capacity and expects capex on wafer fabrication equipment in the Aug 2023 fiscal year to be down from the roughly US$12b it expected to spend in 2022. In the next few months, we expect broad capex cuts announcements from memory chip companies and second-tier foundries, as well as potential delays at top-tier foundries,” added RHB. 

Unlike semiconductor companies, manufacturers like Venture will likely do better in 2022.

“Manufacturing stocks have been largely impacted by the global component shortages of the last two years. However, we think that this will likely ease in 2H22, which will lead to much better performance for this year and – possibly – lead to a positive sector re-rating,” said RHB.