Investing.com -- JPMorgan analysts remain cautious on European semiconductor stocks, particularly those exposed to the automotive and industrial sectors, citing persistently high inventory levels and weak demand.
"Inventory reduction stalled in 4Q24 on the back of weak demand in some semiconductor markets," the analysts noted, emphasizing that auto/industrial semiconductor inventory remains nine weeks above normalized levels.
Among the key data points, the bank says inventory in the auto/industrial semiconductor sector increased by seven days quarter-over-quarter, reaching 176.6 days in Q4.
This level is said to be 57% higher than the pre-COVID average from 2015 to 2019. "At this point with ~9 weeks of excess inventory, even if one assumed that normalized inventory will be higher than pre-COVID, say by 2+ weeks, this would still mean that normalizing the inventory will take over 1 ½ years, over which the stocks will likely struggle to perform," JPMorgan (NYSE:JPM) explained.
Despite some improvement in other segments, automotive and industrial semiconductor companies continue to struggle with elevated inventory, says the bank.
"Most companies in our database of auto/industrials exposed companies saw an increase in inventory days," the analysts noted, highlighting Allegro (WA:ALEP), Infineon (OTC:IFNNY), Melexis (EBR:MLXS), Microchip (NASDAQ:MCHP), and Power Integrations (NASDAQ:POWI) as those with the biggest inventory build-up. However, STMicro, Coherent (NYSE:COHR), Wolfspeed (NYSE:WOLF), and Rohm saw inventory days decline.
The industrial semiconductor sector is expected to recover sooner, as it has been in an inventory correction phase since Q3 2023.
Meanwhile, the automotive sector's inventory data "does not indicate normalization in four quarters," leading JPMorgan to maintain Neutral ratings on Infineon, STMicro, and Melexis.
While ASML (AS:ASML) and ASM International (AS:ASMI) remain favored due to their exposure to volume semiconductor markets, JPMorgan's overall stance on auto/industrial semiconductor stocks remains cautious, with no immediate catalyst for a stock price recovery.