This year’s AI stock frenzy has papered over cracks in the semiconductor market. Beyond the enthusiasm for the likes of Nvidia Corp and Advanced Micro Devices Inc, it’s a mixed picture for investors.
Recent earnings pointed to slumping industrial and networking chip markets, while some on Wall Street are bracing for the impact of a potential economic slowdown on automobile chips. On the flip side, smartphone components and personal computers look set for recovery, according to Samsung Electronics Co and Intel Corp.
“It’s important to avoid painting semis with a broad sector brush,” said Brent Fredberg, portfolio manager at Brandes Investment Partners. “The concern is that the industry may now be entering a period of excess inventory digestion.”
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Broadcom Inc, which has gained 62% this year, is due to report earnings late Thursday. Its performance and outlook should provide a window into the various forces driving the industry’s prospects. While it makes networking gear and some custom chips that have played a role in the massive run up in investment in AI infrastructure, the firm has a broad set of products going into automotive, industrial equipment, data centers and smartphones.
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Lurches between boom and bust are nothing new for the industry. Chipmakers have consistently failed to match long-term planned introductions of new supply with short-term swings in demand, creating often vicious cycles. Just two years before shortages of the pandemic caused widespread panic across the economy, chipmakers and their customers were awash with inventory and orders dried up. Now some of them are in that same boat again.
“The automotive and industrial end-markets remain in the midst of a cyclical correction as customers digest inventories, which we expect will trough within the next 4 months,” Angelo Zino, vice president and senior equity analyst at CFRA Research wrote in a report. While smartphones and PCs appear to be stabilizing, “whether this momentum is sustainable into 2024 remains to be seen,” he added.
Many industry executives have argued that the breadth of demand for semiconductors across so many products offers some insulation from downturns. But the diverging behaviour of that more varied line up of markets has made the job of investing at the right time in the cycle more difficult.
See also: Samsung's profit falls again on uneven chip demand recovery
Philadelphia Stock Exchange Semiconductor Index laggard Texas Instruments Inc, down 5.6% this year, has one of the broadest ranges of customers and products across the chip business. It said the key industrial market got weaker in the third quarter, contracting about 5%. Revenue related to communications components dropped more than 10%.
Elsewhere, the rapid run up in demand for auto chips may have overshot. The third quarter was the fourteenth in a row that automotive semiconductor revenue has exceeded projections, according to New Street Research analyst Pierre Ferragou. The amount of chips per car continues to increase but “has started to normalize” he wrote in a report. Automakers on aggregate are no longer adding to their inventory stockpiles, while car dealerships have record levels of vehicles on their lots — signalling the likelihood of a correction, he wrote.
Still, some companies appear to be through the worst. Micron Technology Inc, the largest US maker of computer memory semiconductors, raised its revenue guidance for the first quarter late last month citing an improving price environment now that the slump in PC and smartphone demand is easing.
Systems being built around Nvidia processors will need memory and many other chips to support them, according to Thomas Martin, senior portfolio manager at Globalt Investments. But it won’t make them immune to the next downturn.
“Every time you say that about the chips, they always surprise you and the cycle happens anyway,” said Martin. “So you have to be wary.”
