Are Semi Equipment Stocks & Industry Rolling Over?
Is there any Upside in the second half of 2015?
Waiting for next years iPhone 7 refresh?
Does Windows 10 even matter?
“Sell in May and Go Away”
An old investor’s adage that has proven correct this year. The Semiconductor Equipment stocks seemed to have had a nice run up after reporting Q1 numbers in April which propelled the stocks higher into the first part of May. The euphoria of a good Q1 seemed to fade with a string of less than positive tech news related to semis, perhaps started by the weakening of the DRAM market.
The stocks then flattened in the second half of May and started to “roll over” in the beginning of June. That downward trendily picked up speed in the beginning of July and seems to have accelerated post Semicon West and into initial earnings results. This acceleration was partly due to capex issues from Intel & TSMC and partly do to a less than stellar tone coming out of Semicon West. Earnings news so far hasn’t lit anyone on fire yet.
Semicon Didn’t help much…
We were clear in both our preview of Semicon and our summary, post Semicon that there was no motivation to go out and buy Semi equipment stocks as there wasn’t enough positive tone to offset the negative news and questions going into the show. If anything the flattish tone of the show made us more concerned…
The question now becomes “Is this just a pause or a lull or will the industry roll over and see a downturn?” The stocks seem to be forecasting a downturn rather than a pause.
A one legged stool….
It would appear the only remaining strong driver in the industry is 3D NAND spending, the other three legs of the stool, foundry, logic & DRAM are less than stable.
The second half of 2015 will have to see a significant uptick in 3D NAND spend to offset reductions in other areas….and that would be hard enough to get to a flat second half, it will be way harder for #D NAND spending to both offset weak spending and be strong enough to power an increase in the second half.
Where to hide if things roll over…
Historically consumables tend to be more stable than capital equipment plays when it hits the fan. Fabs still need consumables such as slurry, photomasks, filters, probe cards etc; etc. This would suggest that companies such as CCMP, PLAB, ENTG and FORM should far a bit better even though they will see the downturn as well. CCMP is a bit weaker but slurry sales will continue. FORM appears to be oversold by an overreacting market as its enterprise value has been cut in half and we are relatively sure that business won’t be cut in half. ENTG continues to be a strong performer.
What could suffer more…
Sub suppliers that provide components to the bigger equipment companies tend to be at the “end of the whip” and fall faster in a downturn and climb higher in an upturn. In a downturn, companies such as AMAT & LRCX slow down orders and burn off inventory. Sub suppliers are a leveraged play to the equipment companies. In this category we find AEIS, BRKS & MKSI. Though all three have been doing a good job of trying to diversify, at the end of the day they are still leveraged to equipment companies.
Back End not a hiding place…
Back end spending has been more stable in past years but appears to be falling off a bit with front end this time around. In the test area we do not see major changes that would drive significant new testers sales such as a transition from 4G to 5G (which is still way , way off). Internet of things can be tested on existing tools as we are not talking about a significant change in capability. Assembly and inspection in the back end also is not great as we saw from BESI’s guidance and UTEK’s results. We would anticipate that back end business at RTEC may see a similar weakness.
Playing 3D NAND exposure…
If we wanted to stay in large cap equipment companies we would likely choose LRCX as they appear to have the highest exposure to 3D NAND and multi patterning. At Semicon , LRCX pointed out that they have the number one share in the 3D NAND market which could help them as memory exposure has helped them in the past.
Windows 10 is a non event…
It seems as if Windows 10 is not event a factor in the semiconductor industry. In years past, before the advent of smart phones and tablets, each new version of Windows would drive a huge up cycle in the chip industry and so far Windows 10 is more like a lame whimper which appears to have zero impact on spending and chip production.
Following the Iphone refresh cycle…
Cycles in the semi industry continue to reinforce the seasonal pattern. We are well into production of the components for the Iphone 6S so its clear that we aren’t going to be spending in the near term for either processors in the 6S or memory we are past the spending season for chips in the 6S and we aren’t into the period where spending will pick up yet for the Iphone 7, so we are stuck in a natural lull.
Macro questions still remain and Android phones are not on fire. Qualcomm’s recent results throw another wrench into the Semi industry as you can’t imagine them being as aggressive in the number of different SKUs or overall demand for chip capacity in the industry. We would imagine that Qualcomm will certainly be more conservative and that translates to spending less.
Given that we will be going into the dead zone of August its likely the stocks may be”dead money” for a while or at least until the Iphone 6S launch in the fall. The only thing going on near term is Windows 10 and doing a product upgrade as we enter August seems like timing guaranteed to fail. But then again our expectations of Win 10 are zero anyway….
The next chance for the stocks to recover may be in October but right now we are not holding our breath for that….
Semiconductor Advisors LLC
Also Read: Intel 10nm delay confirmed by Tick Tock arrhythmia leak-“The Missing Tick”