Taking Stock: Semiconductor Slowdown Lingers - InformationWeek

InformationWeek is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them.Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Business & Finance
04:55 PM
William Schaff
William Schaff

Taking Stock: Semiconductor Slowdown Lingers

We're at an interesting crossroad in this semiconductor cycle.

This hasn't been a good year for semiconductor stocks. The Philadelphia Semiconductor Index is off by almost 28% since peaking in mid-January. The semiconductor industry tends to move in cycles, and the trick is to ascertain where we are in the cycle.

Two weeks ago, Intel kicked off this quarter's round of news, which tends to come before formal earnings announcements, when it finally acknowledged that its growing inventory is a problem. Analysts had already keyed in on that when Intel last reported earnings. During its midquarter update on Sept. 2, Intel lowered its revenue forecast because of slack demand, primarily from consumers. Intel's stock fell 7.3% the next day and has been range-bound between $20 and $21.

Next in line was Texas Instruments, which blamed its sales shortfall on weak demand for mobile phones. TI reduced its expectations for revenue from a range of $3.2 billion to $3.44 billion to a range of $3.1 billion to $3.24 billion. Its customers faced rising inventories and decided to work them off before ordering additional chips. As if to reiterate TI's message, RF Micro Devices revealed two weeks later that it, too, faced excess inventory, specifically from Asian handset manufacturers. Another victim is LSI Logic. It reported seeing a "broad-based build of inventory" that started in the second quarter and apparently continued into the third. LSI Logic sells chips used in consumer electronics such as DVD recorders, but also for data storage, which would point to a slowdown in business spending.

The weakness doesn't appear to be isolated to one segment of the market. PMC-Sierra has underscored that point. The company had been expecting revenue of approximately $89 million but was forced to reduce its estimate to around $72 million. PMC-Sierra blamed changes in demand for DSL lines in Asia, indicating that demand for communications equipment also may be softening.

The numerous warnings about lower-than-expected sales from semiconductor companies also will affect semiconductor capital-equipment firms, which design and manufacture the machines that produce semiconductors. Teradyne already has reduced its revenue forecast, and my guess is that more weak numbers will follow.

Is it time to buy into this downtrodden sector? While the recent spate of bad news means that semiconductor companies will report minimal quarter-over-quarter revenue growth, most still will report year-over-year growth. We're at an interesting crossroad: On one hand, we could see semiconductor sales pick up if the global economy truly gains traction. On the other hand, it wouldn't be unusual for the semiconductor industry to see growth roll over and eventually experience a period of contraction before resuming. Whichever direction the cycle takes, valuations remain too expensive, in my view. But it's worthwhile to keep an eye on these stocks, for there will be a time when their direction becomes clearer.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.

We welcome your comments on this topic on our social media channels, or [contact us directly] with questions about the site.
Comment  | 
Print  | 
More Insights
The State of Cloud Computing - Fall 2020
The State of Cloud Computing - Fall 2020
Download this report to compare how cloud usage and spending patterns have changed in 2020, and how respondents think they'll evolve over the next two years.
Top 10 Data and Analytics Trends for 2021
Jessica Davis, Senior Editor, Enterprise Apps,  11/13/2020
Where Cloud Spending Might Grow in 2021 and Post-Pandemic
Joao-Pierre S. Ruth, Senior Writer,  11/19/2020
The Ever-Expanding List of C-Level Technology Positions
Cynthia Harvey, Freelance Journalist, InformationWeek,  11/10/2020
Register for InformationWeek Newsletters
Current Issue
Why Chatbots Are So Popular Right Now
In this IT Trend Report, you will learn more about why chatbots are gaining traction within businesses, particularly while a pandemic is impacting the world.
White Papers
Twitter Feed
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.
Sponsored Video
Flash Poll