Semis go from worse to bad

Qualcomm appears ahead of their forecast – you may recall Taiwan Semiconductor has been seeing rush orders.  In handsets, Samsung appears to be running down 15% versus their guidance of down 20% – they’re a major Qualcomm customer.  Some aggressive notebook inventory destocking has bumped into some kind of near-term bottom and component orders are rising in February off January’s lows.  Sounds good.  Really, though, its an inventory adjustment.  End market demand has slowed and the PC and handset markets are likely to shrink this year.  We’re moving from one extreme downtrend of inventory destocking in semis to another less extreme downtrend in industry unit shipments as illustrated in this chart from Citi:

Share price recovery is likely to remain muted in absence of end market pick-up.  In fact, the last time we had a downtrend with a trajectory anything like this was 2001-2002.  From a Barclays note yesterday:

But if history is a guide then second derivative buyers beware: semi growth (figure 1) accelerated from -42% YoY in Q4-01 to +9% YoY in
Q4-02 but the SOX declined from 522 to 289 (-45%).

Despite order growth, overall declining market conditions created significant downside to share prices over a period of recovery.  The problems plaguing the dot com unwind of 2001-2002 were a function of inability to create financing and an oversupply of equipment.  Though this downturn is more related to constricted consumption and a fouled up credit market, the root of the problem is too much underlying consumption assumption.  Credit has fueled much of the consumer spending bubble of the last several years and that consumer spending bubble has been greatly beneficial for companies that make electronic gadgets.  Those heady days are over for now.

Semis are going from worse to bad and that may create opportunities for short-term traders.  The longer-term trend remains down and extreme strength should be sold.  Semis remain expensive and vulnerable to significant gross margin reduction as unit prices continue to be pressured.  OEMs tend to pay less for components in a declining unit price environment and there’s not much semis can do about it.