Samsung profit is all semi, But Capex down, second order derivative trading- Rubber ceiling, Samsung had yet another fantastic quarter with semiconductor profits far above and beyond other divisions which paled or dropped by comparison. Samsung also passed Intel to become the number one chip maker, which was already a foregone conclusion. Samsung is also not shy about supporting its golden goose by more than doubling spending last year. So much so that they alone counted for one out of every three dollars spent on capital equipment last year.
While not giving numbers, Samsung did say that capital spending would be down this year. The question on everyone's mind is "how far down?".
It is also a foregone conclusion that Iphone X production is down according to everyone in the supply chain. Again the question is how far down as this will clearly impact not just NAND demand, of which the iPhone X is a NAND pig, but also logic which will drive foundry demand, especially at the leading edge.
Lastly, chip equipment stocks have again bounced off of and retested prior high limits that memory worries had created in the end of last year. This time, however, stocks are bouncing off those same limits after reporting very good quarters. This could be an even more ominous sign as compared to just the "fear factor" of slowing memory. When stocks go down on good news.......god help you if you report just in line or heaven forbid a miss!!!
The triple Threat - Samsung , Apple & Selling on an earnings beat
Samsungs Spending
View attachment 21093
Chart from IC Insights
This chart seems to say it all with a picture. We all know the numbers but a picture speaks volumes. If we were to take away the labels and stopped someone on the street and ask if 2017 was likely a sustainable trend I think I know what their answer would be after they stopped laughing. Yet many industry analysts are talking about capex being up again with Samsung leading the charge.
Even if Samsung is down only 10% or 20% ($2.6B or $5.2B) who is going to make up for that? We don't think it will be Intel. While TSMC recently announced a large new fab, the spending is spread out over many years. The problem is that Samsungs spend is so large, one of every three dollars, that it alone makes up the marginal dollar difference that has driven every chip equipment companies upside.
In a worst case scenario if Samsung went back to its prior trendline of about $13B per year it would mean a 50% drop.
A best case scenario would be a drop of only 10% which would still mean that other companies would have to kick up their spend significantly just to keep total capex flat year over year.
We think Samsung will continue to spend biggly on NAND production, may slow DRAM at some point and will keep up the foundry/EUV spending, just clearly not at last years rate. So while we don't have an answer as to how far down Samsung will be, we do know its down which means total capex growth is going to be difficult to come by.
Apple iPhone X and chip demand
We do know that both Apple and Samsung are the two biggest users of semiconductor devices. Apple seems to be driving the leading edge of Moore's law by demanding ever better transistor performance.
Now that the iPhone X seems to be slowing, what will that mean as to Apple's rate of consumption of chips? When you think about the Iphone X, its higher end model uses 256GB of NAND or roughly the size of an average SSD. When I bought an iPhone X I opted for the 256GB with the thought of "in for a penny, in for a pound", if you are dropping a $1000 on a phone just go all the way....
This also means that if iPhone X production drops, so does a lot of demand for NAND. How much is hard to say, I guess we will find out from Apple.
Second order derivative trading and transparent rubber ceilings
We have long been a proponent of second order derivative stock trading. That is that its doesn't matter whether business is improving or falling but rather what the rate of increase or decrease is doing. Whether our quarter over quarter is increasing or decreasing, even if still positive.
Its clear that the second order derivate is indeed negative and the rate of increase has slowed over last years ludicrous rate. This is also one of the main reason's that stocks have sold off in the face of great quarters and up guidance. Basically the up guidance is not as up as it was previously.
We also find it interesting that the stocks which recovered all they lost in the memory scare only to bounce off the same transparent rubber ceiling stock prices seems to be telling us that investors are resistant to ever increasing values we saw last year.
Its unclear how many times we will retest these limits or if these will prove to be peak values but for now the ceiling is very solid.
Micron and Memory
Even though we are worried about capex spend and overall chip demand we still think there is enough room left and Micron stock seems to still be way cheap compared to its peers. Micron obviously had a positive reaction to Samsung's comments about memory pricing and supply/demand balance.
We think that Micron still has a lot of profit in front of it and remains a good stock bet. We think that Samsungs slowing capex is good for memory capacity as it means they are being much more conservative than the bad old days where memory makers keep spending until they drove off a cliff.
OPEC and OMEC
We tend to view the memory market much like another commodity market such as the petroleum market. After many years of stupid behavior, oil producing countries banded together to limit and control supply of oil in order to control pricing and profitability of the ultimate commodity. Perhaps memory makers should get together and form OMEC- the Organization of Memory Exporting Companies. Samsung could play the role of the 800lb gorilla, Saudi Arabia with the rest of memory makers jousting for their place in the industry. The key here is preventing stupid self harming behavior.
Perhaps in a case of Darwinism we have already culled out the stupid memory makers and are left with a gene pool of smarter memory makers. Spending less money on capex is a sign of intelligence and planning to keep supply from getting out of hand and causing harm as it has in the past. While we not say that every memory maker has suddenly gotten religion, we do think on average we are way better off and way more sustainable, thus would not be surprised to see modulation of spend to keep things in balance.
In the long run, more modulated memory spend is also good for equipment makers as it lowers the volatility of cycles.
About Semiconductor Advisors LLC
Semiconductor Advisors is an RIA (a Registered Investment Advisor), specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.
While not giving numbers, Samsung did say that capital spending would be down this year. The question on everyone's mind is "how far down?".
It is also a foregone conclusion that Iphone X production is down according to everyone in the supply chain. Again the question is how far down as this will clearly impact not just NAND demand, of which the iPhone X is a NAND pig, but also logic which will drive foundry demand, especially at the leading edge.
Lastly, chip equipment stocks have again bounced off of and retested prior high limits that memory worries had created in the end of last year. This time, however, stocks are bouncing off those same limits after reporting very good quarters. This could be an even more ominous sign as compared to just the "fear factor" of slowing memory. When stocks go down on good news.......god help you if you report just in line or heaven forbid a miss!!!
The triple Threat - Samsung , Apple & Selling on an earnings beat
Samsungs Spending
View attachment 21093
Chart from IC Insights
This chart seems to say it all with a picture. We all know the numbers but a picture speaks volumes. If we were to take away the labels and stopped someone on the street and ask if 2017 was likely a sustainable trend I think I know what their answer would be after they stopped laughing. Yet many industry analysts are talking about capex being up again with Samsung leading the charge.
Even if Samsung is down only 10% or 20% ($2.6B or $5.2B) who is going to make up for that? We don't think it will be Intel. While TSMC recently announced a large new fab, the spending is spread out over many years. The problem is that Samsungs spend is so large, one of every three dollars, that it alone makes up the marginal dollar difference that has driven every chip equipment companies upside.
In a worst case scenario if Samsung went back to its prior trendline of about $13B per year it would mean a 50% drop.
A best case scenario would be a drop of only 10% which would still mean that other companies would have to kick up their spend significantly just to keep total capex flat year over year.
We think Samsung will continue to spend biggly on NAND production, may slow DRAM at some point and will keep up the foundry/EUV spending, just clearly not at last years rate. So while we don't have an answer as to how far down Samsung will be, we do know its down which means total capex growth is going to be difficult to come by.
Apple iPhone X and chip demand
We do know that both Apple and Samsung are the two biggest users of semiconductor devices. Apple seems to be driving the leading edge of Moore's law by demanding ever better transistor performance.
Now that the iPhone X seems to be slowing, what will that mean as to Apple's rate of consumption of chips? When you think about the Iphone X, its higher end model uses 256GB of NAND or roughly the size of an average SSD. When I bought an iPhone X I opted for the 256GB with the thought of "in for a penny, in for a pound", if you are dropping a $1000 on a phone just go all the way....
This also means that if iPhone X production drops, so does a lot of demand for NAND. How much is hard to say, I guess we will find out from Apple.
Second order derivative trading and transparent rubber ceilings
We have long been a proponent of second order derivative stock trading. That is that its doesn't matter whether business is improving or falling but rather what the rate of increase or decrease is doing. Whether our quarter over quarter is increasing or decreasing, even if still positive.
Its clear that the second order derivate is indeed negative and the rate of increase has slowed over last years ludicrous rate. This is also one of the main reason's that stocks have sold off in the face of great quarters and up guidance. Basically the up guidance is not as up as it was previously.
We also find it interesting that the stocks which recovered all they lost in the memory scare only to bounce off the same transparent rubber ceiling stock prices seems to be telling us that investors are resistant to ever increasing values we saw last year.
Its unclear how many times we will retest these limits or if these will prove to be peak values but for now the ceiling is very solid.
Micron and Memory
Even though we are worried about capex spend and overall chip demand we still think there is enough room left and Micron stock seems to still be way cheap compared to its peers. Micron obviously had a positive reaction to Samsung's comments about memory pricing and supply/demand balance.
We think that Micron still has a lot of profit in front of it and remains a good stock bet. We think that Samsungs slowing capex is good for memory capacity as it means they are being much more conservative than the bad old days where memory makers keep spending until they drove off a cliff.
OPEC and OMEC
We tend to view the memory market much like another commodity market such as the petroleum market. After many years of stupid behavior, oil producing countries banded together to limit and control supply of oil in order to control pricing and profitability of the ultimate commodity. Perhaps memory makers should get together and form OMEC- the Organization of Memory Exporting Companies. Samsung could play the role of the 800lb gorilla, Saudi Arabia with the rest of memory makers jousting for their place in the industry. The key here is preventing stupid self harming behavior.
Perhaps in a case of Darwinism we have already culled out the stupid memory makers and are left with a gene pool of smarter memory makers. Spending less money on capex is a sign of intelligence and planning to keep supply from getting out of hand and causing harm as it has in the past. While we not say that every memory maker has suddenly gotten religion, we do think on average we are way better off and way more sustainable, thus would not be surprised to see modulation of spend to keep things in balance.
In the long run, more modulated memory spend is also good for equipment makers as it lowers the volatility of cycles.
About Semiconductor Advisors LLC
Semiconductor Advisors is an RIA (a Registered Investment Advisor), specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.
Last edited: