Chipmakers Face Threat of Long-Term Slump
WHY YOU SHOULD CARE
Because semiconductors are central to our economies — and our lives.
By Emma Dunkley and Nicole Bullock
When Apple, the world’s most valuable company, revealed this month that it would no longer disclose how many iPhones or Macs it sells, talk of “peak iPhone” swirled around the market.
Although a seemingly minor reporting adjustment, the change reflects a broader concern that demand for smartphones is falling, sending shock waves through the global semiconductor sector and other parts of the iPhone supply chain.
That, combined with other problems from falling cryptocurrency values to global trade wars, has prompted questions over whether the once high-flying semiconductor industry is facing a long-term, structural slump.
“In the last couple [of] years, semiconductors along with … other tech stocks have done really well,” says Michael Arone, U.S.-based chief investment strategist at State Street Global Advisors. “They have had high growth rates and they have been beneficiaries of mobile phones, tablets and gaming.”
He adds: “People are concerned the revenue growth won’t live up to expectations … If folks are not upgrading their devices at the same rate — whether phones or tablets or gaming — if the rate of replacement is slower, it is going to be an important signal that the economy is slowing.”
Semis continue to play an ever-increasing role in the global economy and all of our lives.
Chris Retzler, portfolio manager, Needham Funds
The sector was dealt a huge blow on Monday when Chinese authorities claimed to have uncovered “massive evidence” of antitrust violations by three of the world’s top memory-chip manufacturers.
Officials in Beijing said an investigation into South Korea’s Samsung Electronics and SK Hynix, and U.S.-based Micron had made “important progress.” The three companies account for more than 95 percent of the world’s supply of DRAM memory chips.
Fears of slowing global economic growth, mounting trade tension between the U.S. and China, a bear market in Chinese equities and the slump in cryptocurrency prices are also driving investors to cut risk, leading them to trim exposure to technology and semiconductor stocks that are more sensitive to the economy.
In the past few weeks, shares in some of the world’s biggest semiconductor companies such as Taiwan Semiconductor, Samsung Electronics and Advanced Micro Devices in the U.S. have dropped, as nervous investors chop their holdings.
Those falls came after several companies in the sector issued weak third-quarter earnings, pointing to an oversupply of memory chips and waning demand for products that use them.
Samsung Electronics, one of the largest technology groups in Asia, warned at the end of October of a decline in the price of memory chips because of China’s rapid capacity expansion. The alarm bell was sounded even as the electronics group, which derives 80 percent of its profits from memory chips, posted a record quarter for earnings.
Even the slump in the price of cryptocurrencies, with bitcoin falling from a high above $19,000 last year to below $6,000, is having a detrimental impact. TSMC, one of the largest technology companies in Asia, said in its third-quarter earnings that “continued weakness in cryptocurrency mining demand” would offset some of its growth in the fourth quarter.
On Thursday, shares in U.S. group Nvidia, which makes gaming chips, fell as much as 17 percent after the company missed revenue expectations, which it blamed on the “crypto hangover” resulting from growing chip stockpiles as cryptomining activity tapers off.
Investors have also aired deeper concerns over the potential impact of a prolonged trade war between the U.S. and China.
“A lot of stocks have been punished during the trade tension, so any reversal should see a relief rally in the short term,” says William Yuen, a fund manager at Hong Kong–based Invesco.
Despite the immediate headwinds, investors said the longer-term case for semiconductors is attractive, in part because of the growing demand for them in sectors such as cars and industrials, which are increasingly turning to robotics and artificial intelligence.
Chris Retzler, portfolio manager at Needham Funds, says semiconductors are a barometer of the broader economy. “Semis continue to play an ever-increasing role in the global economy and all of our lives … we are seeing semis more widely used in industrial areas like health care, energy, automobiles.”
The share price weakness might provide an attractive entry point for investors who believe in the growth story. “Samsung is arguably the cheapest large-cap tech stock in all of Asia right now,” says Oliver Cox, a fund manager at JPMorgan Asset Management. “Memory storage chips remain the primary source of profits and Samsung is the dominant global leader in the memory market in terms of share, profitability and technological capability.”
He adds: “Current market conditions provide a classic test of investors’ long-term convictions. We have been increasing large-cap tech exposure at the margin.”
Still, investors are well aware of the likelihood of further share price falls in the coming months, against a backdrop of geopolitical and economic uncertainty.
Casey McLean, an investment analyst at Fidelity International, says there is likely to be further falls in share prices as companies cut profit guidance. He says that the sector is about two-thirds of the way through the sell-off. “This coincides with the inventory cycle, which has built up amid demand weakness,” he explains. “It will take a few quarters to run down.”
Investors will be watching the upcoming G-20 meeting for signs of a reconciliation between China and the U.S., although any warm words will be treated with skepticism as investors brace for a new set of trade tariffs at the start of next year.
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