Article confirms market fears…
An article in the Korea Times cites sources that say Samsung will cut Semi Capex by 20% due to current oversupply and weak pricing. This is obviously a huge negative as Capex for 2016 will certainly be down significantly from 2015 given these cuts which follow on cuts by Intel and others. We can only assume that Micron and SK Hynix will also cut spending on DRAM as they are also acting more rationally then they have in the past.
This will force further capitulation…
Semiconductor Bulls have been saying that 2016 capex is in good shape and that Samsung will keep Capex flat. Those analysts who have remained too bullish for too long are going to have to back pedal and capitulate and start to take numbers down.
How long a drop in spend???
We would expect that Samsungs spending cut will remain in effect throughout 2016 as it will take a while to sop up the excess capacity in the market. It is also clear that 3D NAND and foundry will not make up for the drop in DRAM spend as DRAM has been spending at a much higher than normal rate for a while now.
We have been very clear that this wouldn’t last forever and sooner or later things would come back to the industry’s normal cyclical behavior. We continue to maintain that while the cyclicality is not as severe it is still none the less a cyclical industry……though many in the industry have developed amnesia given the length of the upturn.
Micron & SK Hynix likely to follow…
With everybody in DRAM behaving better its logical to assume that both SK Hynix and Micron will also cut back their spend. We would assume that Micron, which is naturally a cheapskate when it comes to capex, will easily slow spending. We do expect an uptick in spending related to Xpoint memory but not likely to make up for a drop in DRAM. SK Hynix is not in the financial shape of Samsung and thus is less able to tilt against the winds of declining DRAM pricing and over supply.
Stocks will see further downside…
We had suggested a $60 downside to LRCX which has fallen off the proverbial cliff in the last week. Given the momentum it may push through $60 and all bets would then be off. This is a far cry from $80+ the stock had reached but you live by the sword of memory, you die by the sword of memory…….
A small cap stock that has high Samsung exposure is Mattson which could easily face another near death experience if Samsung cuts spending significantly as Mattson is a marginal supplier and less of a core supplier and thus on the edge. We had suggested a $2 downside and again, we could break though that as well.
KLAC is the least impacted…
Of the large semi equipment companies KLAC will be the least impacted as they have the lowest exposure to memory and higher exposure to logic and foundry which seems to be at or near a bottom. KLAC recently said that business had seemed to be at the high end of very lowered expectations.
We remain underweight the group…
We have been very clear that we were not at the bottom for the stocks and we are likely still not there yet but we are getting closer. Q3 reports could be one of the last nails in the coffin that puts the stocks on the bottom of their cyclical range in valuation. We don’t see a lot of support for the group or near term catalysts to turn things around. News flow will remain negative in the near term
Robert Maire
Semiconductor Advisors LLC
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