By Wallace Witkowski
After two years of unprecedented chip sales and demand related to the COVID-19 pandemic, a long-feared reversal has struck the semiconductor industry, but some markets are still performing strongly — for now.
Last week, two of the biggest names in the semi industry — memory-chip specialist Micron Technology Inc. /zigman2/quotes/205710729/composite MU +0.83% and graphics-chip titan Nvidia Corp. /zigman2/quotes/200467500/composite NVDA +2.60% — warned that a sharp downturn in sales has begun. Those warnings followed dismal results and a forecast revision from Intel Corp. /zigman2/quotes/203649727/composite INTC +0.89% , which has long been the U.S. leader in chip sales.
Wall Street analysts have been expecting a turnaround in the chip sector for months . And as pandemic-era shortages eased and customers realize they ordered too many semiconductors in the frantic rush of the chip crunch, stocks cratered. So far, though, the downturn shown in earnings reports has been focused on chips meant for consumer electronics, such as personal computers and smartphones, which have seen a similar sharp downturn in demand as the pandemic stretches through its third year.
Bernstein analyst Stacy Rasgon told MarketWatch in an interview that “the consumer side of things seems to kind of sort of be in a recession.”
“Intel’s PC stuff imploded. Nvidia, negative preview the other day, their GPUs have imploded. Memory has been horrendous. Anything that is consumer-focused has been bad: PCs, smartphones, GPUs, TVs,” Rasgon told MarketWatch, adding that it will not be a short-term problem — “Things are getting weaker and they don’t usually get weaker for one quarter.”
“There was a lot of accelerated demand, and now, best case, it’s normalizing, sort of like reversion to the mean,” he said.
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Demand is not falling off — yet — in a couple of hot sectors, however. The auto and industrial businesses particularly appear to still have strength, and it shows up in the respective stock performance of chip companies focused on those sectors.
Texas Instruments Inc. /zigman2/quotes/202237907/composite TXN +1.30% , which has a big presence in auto chip sales, reported an outlook that topped Wall Street estimates at the time . Other U.S. suppliers to the auto industry include Analog Devices Inc. /zigman2/quotes/201631938/composite ADI +1.95% and ON Semiconductor Corp. /zigman2/quotes/202641012/composite ON +1.88% , , while outside the U.S., big names include Netherlands-based NXP Semiconductors NV /zigman2/quotes/202999625/composite NXPI +1.91% , Japan’s Renesas Electronics Corp. /zigman2/quotes/203872935/delayed JP:6723 +0.82% and Murata Manufacturing Co. /zigman2/quotes/204266745/delayed JP:6981 +0.46% , and Germany’s Infineon Technologies AG /zigman2/quotes/203152288/delayed XE:IFX -0.60%
“The demand for auto chips is strong with a backlog that will sustain for at least the next year, making chip stocks a safer port in the coming economic storm,” Maribel Lopez, principal analyst at Lopez Research, told MarketWatch.
“There will be a coming slump, but there’s currently pent-up auto demand,” Lopez said. “What I expect to see happen is dealers won’t be able to charge above [the suggested retail price] as demand wanes.”
While those chips are still selling strongly, the most worrisome development this earnings season could be a softening in data-center growth, a big reason for the excitement about Nvidia and Advanced Micro Devices Inc. /zigman2/quotes/208144392/composite AMD +1.77% in recent years. Case in point: While Intel fell short of Wall Street expectations for data-center sales by about $1.5 billion, AMD picked up an additional $700 million in data-center sales it didn’t have in the year-ago quarter. Now, Nvidia’s data-center growth is looking to be underwhelming.
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Intel was “overshipping by a massive amount,” Rasgon told MarketWatch. “I’ve been making that point for over a year. That is now biting them. And now they are calling out some pretty significant channel inventory corrections.”
Intel is blaming supply-chain issues, basically saying that manufacturers can’t build as many servers because they can’t find other components, such as power supply parts, but Intel’s issues could just come down to competition as well, Rasgon said. While other executives also mention the same issues as Intel in their earnings reports, “they’re not getting nailed nearly as much,” the analyst said.
“I don’t know if those supply chain issues explain Intel’s miss,” said Rasgon, who has buy-grade ratings on AMD and Nvidia and a sell-grade rating on Intel.