Semicon West was sluggish with hopes of 2020 recovery

Bouncing along a not too bad bottom
Given that we have followed the semiconductor industry through many down cycles, we can safely say that this one isn’t all that bad by comparison. Everyone, big & small, is still safely profitable and in relatively good shape. Though we are seeing the normal week long holiday shut downs typical of the downcycle we are not seeing wholesale layoffs or cuts.  Its not all that painful (by comparison to past down cycles). While not busy and up beat , Semicon West was not the funeral we had experienced in past down turns.

The “new normal” will be different than the “old normal”
We think that when the industry does recover, it won’t be the rip snorting, maniacal memory spending we saw in the last up cycle. It will likely be more evenly balanced between memory and logic and we would not be surprised if logic/foundry led the way off the bottom rather than having a memory driven recovery.

There are likely those who would say that you can’t have a “real” recovery without memory (and we might be one of them…), but we could have some sort of recovery.

The past cycle was an almost perfect storm of memory spend, driven by the conversion from rotating media to SSDs, sucking up a tidal wave of NAND.  At the same time, the industry was going through a massive conversion from 2D planar memory to 3D NAND, buying equipment in leaps and bounds. We are now well past the bulk of the SSD conversion as well as virtually 100% of the 3D NAND conversion, those waves have washed over the industry and subsided very quickly as the tide went out following them.

Memory industry will be gun shy for a while-
Given the beating that memory pricing has taken we doubt that memory makers will jump back into spending with prior vigor.  Spending in memory will be much more measured and incremental. The need for huge spending to convert to 3D doesn’t exist anymore. We also already have enough capacity in the industry for current SSD consumption and then some, so we don’t need big spending for that either. In short, the need for big memory capex doesn’t exist as we are well past the SSD/3D hump…..so don’t hold your breath for it.

5G could push logic/ foundry to recover first
We have heard of some good expected ramping of 5G chips at TSMC and elsewhere over the next several months. 5G devices not only for phones but for infrastructure.  While Qualcomm may be driving the first wave of 5G, others will soon add to the mix. While this is likely not enough to bump up TSMC’s capex significantly given the weakness in overall chip demand, we none the less think it positively impacts demand for leading edge production equipment.

More importantly, this wave of new 5G related demand will likely happen prior to a memory recovery which seems a year or more off at the very least. All this suggests that foundry/logic could recover first and stronger than memory…

The equipment mix will be different in this cycle
If we see a more evenly driven recovery between memory and logic or logic recovers first as we suspect, those companies benefiting will be different than last cycle.  In addition the upcoming cycle will obviously have a more significant EUV component.

We will also likely see a shift away from US suppliers in the coming up cycle as China will find ways to avoid America like the plague. Multiple patterning and multiple layer 3D NAND will be a smaller percentage of spend.

The stocks
In general, we see little reason to buy the stocks now as there is no reason when the recovery is so far off, well into 2020 or beyond.  Its not like the stocks are cheap or have sold off recently.

We would be more selective and look for down drafts or other news or event driven opportunities.  We don’t see much of a potential for upside surprise in the current reporting season either.  We think the potential for investor impatience is higher in the near term.