Chipmakers See ‘Breathtaking’ Drop in Demand as Recession Looms

(Bloomberg) – Evidence is mounting that the tech downturn could be deeper and longer than feared.

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After years of record investments, chipmakers warn weekly that demand is faltering. In the latest sign of trouble, Samsung Electronics Co. and Advanced Micro Devices Inc. reported disappointing results within hours, falling well short of forecasts.

Samsung — the world’s largest maker of memory chips — reported a 32% drop in operating revenue, while PC processor maker AMD said it would miss its earlier forecast by about $1 billion. Analyst reactions ranged from “breathtaking” to “Uff-da!”

The numbers followed somber comments from memory makers Micron Technologies Inc. and Kioxia Holdings Corp., which are cutting spending and production to stabilize falling prices. AMD shares fell in premarket trade, along with chipmakers like Nvidia Corp. and Intel Corp. Chip suppliers such as ASML Holding NV and PC manufacturers such as Lenovo Group Ltd. also fell. Japan’s Disco Corp., whose equipment grinds, polishes and rolls chips, shed its most losses in more than two years on Friday.

“It appears that end demand has likely deteriorated significantly in recent weeks, and end customers appear to be aggressively destocking,” Bernstein’s Stacy Rasgon said. AMD’s cut in customer revenue “is admittedly a bit staggering.”

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Read: ‘Hard times’ as major memory manufacturers scale back production amid supply glut

The outlier was Taiwan Semiconductor Manufacturing Co., which reported a roughly 48% increase in quarterly revenue to about NT$613 billion (US$19.4 billion) — the upper end of its forecast in US dollars — supported through its growing clout as the world’s most advanced chip maker. The drop in demand may not have been fully reflected in the numbers, especially given the sharp depreciation of the Taiwan dollar, said Jeff Pu, an analyst at Haitong International Securities.

Consumer electronics companies that have struggled with shortages during the pandemic are now facing a sudden drop in demand, even as shipping and material costs remain high. Recession fears are making cost-cutting the new norm across the tech industry, and companies that have been hoarding chips for two years are now choosing to cancel or postpone orders and tap inventory just as new capacity comes online.

The semiconductor industry is also grappling with export restrictions from the US government, which is increasing pressure on its allies to prevent cutting-edge chips from being shipped to a growing list of Chinese companies as it tries to contain the Asian country. This complicates the business of chip manufacturers from AMD to Nvidia in the world’s largest semiconductor market.

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Supply and demand aren’t all behind the current downturn, said Heo Pil-Seok, chief executive officer at Seoul-based Midas International Asset Management. “The US government’s export controls would further restrict sales by IT companies in China, and much of the demand for chips would be weakened. If AMD and Nvidia can’t sell their chips in China, memory manufacturers’ profits will continue to deteriorate.”

The PC segment, which has been losing ground to smartphones for years, appears to be particularly vulnerable. But a serious recession would also hurt demand in areas that have remained solid, such as B. in cloud computing, automotive industry and factory automation.

“We would continue to steer clear of PC-centric names, which include AMD, Intel and Nvidia, due to a likely ongoing PC decline into next year and continued weakness in consumer games,” said Baird analysts Tristan Gerra and Tyler Bomba wrote in a note to customers.

Share prices fell across the semiconductor supply chain, from material makers like JSR Corp. to chip equipment manufacturers such as Advantest Corp. and Screen Holdings Co. Even silicon wafer makers like Shin-Etsu Chemical Co. and Sumco Corp. fell.

Read more: Chip stocks in Asia fall as AMD misses sales estimates by $1 billion

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Companies themselves are preparing for a prolonged downturn. Kyung Kyehyun, head of Samsung’s chip business, said last month he doesn’t see the memory market recovering next year. Kyung told employees at an internal event that Samsung lowered its forecast for chip sales in the second half of this year by 32% compared to a forecast in April, according to the Korea Economic Daily.

What Bloomberg Intelligence says

PC demand will remain weak in the 4th quarter given the high inventories of PC processors announced by chipmaker AMD. Won depreciation may not be enough to offset weak sales of memory chips and consumer electronics like TVs.

— Masahiro Wakasugi, BI Analyst

Click here for the full study

Lead times for key components and machinery sometimes exceeded a year during the pandemic, leading companies to stockpile a year’s worth of inventory while chipmakers quickly ramped up capacity. Now that lead times have come down, companies are scrambling to reduce inventories.

“You’re building up supply for demand, which turns out to be not as real as you thought,” Rasgon said. “No party lasts forever”

(Updates with stock price reactions in fourth paragraph)

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