-Short term Covid19 impact is primarily logistics related
-Longer term impact is more systemic/demand driven
-Impact will wind through supply chain over several qtrs
-Other issues, such as trade, remain an overhang
Short term versus long term in the semiconductor industry
The stocks declines over the last months seem to indicate the semiconductor industry flying off a cliff without leaving any skid marks behind. Reality may not be quite as bad as other industries such as airlines, restaurants, hotels etc; as the semiconductor industry is by nature a longer term, slower moving, inherently cyclical animal.
The food chain in semiconductors is fairly long as it can take months to produce chips and the entire life cycle from design to production is usually well over a year. There is a lot of inventory and buffer in the supply chain and unlike the food industry, nothing has a short shelf life.
Airline seats, hotel rooms and food all have a very definitive shelf life which goes to zero value on expiration.
The semiconductor industry doesn’t instantly react to short term changes in demand as those near term changes are absorbed by the supply chain buffer. There is an added “shock absorber” of pricing, which rises and falls depending upon demand and inventory levels.
The semiconductor equipment industry is even more long term in nature, than the chips themselves, as new fabs and fab expansions can take years to plan and even just rolling in one piece of equipment can take several quarters from order to install.
This suggests the semiconductor industry as a whole has the momentum a a very large oil tanker that takes a very long time to either accelerate or stop.
Near term Covid19 issues are primarily logistics
The primary Covid19 impact to the semiconductor industry in Q1 2020 is due to logistical issues of moving people and materials around.
In general, the fabs kept operating for the most part. Fabs tightened down on access by outside persons to the fabs for fear of infection. Tool shipment and installs were slowed due to transport and access issues.
Tool manufacture was impacted by supply chain issues (moving sub components around) as well as people.
The semiconductor manufacturing base relies on free, easy and quick movement of materials and people around the globe and was obviously impacted when that slowed.
To be very clear, we have not heard of any major change in fab plans, expansions, upgrades, and technology advancement that has been impacted in a big way so far. Its not like a foundry is going to cancel its next gen process or significantly delay it.
There have been reports of Samsung delaying its 3NM from 2021 to 2022 and blaming Covid19. While its clear that Covid19 is causing one to two quarter delays in equipment installs and EUV tools were cited as one issue, we think that Samsung has historically been more than overly optimistic in its projections in beating TSMC to the next gen. Samsung has missed most of its prior projections of technology readiness.
When all is said and done we expect a one to two quarter overall delay or “hiccup” in the march of Moore’s law, caused by primarily logistics issues related to Covid19.
Longer term, demand driven issues, harder to determine
We think the bigger variable, and one that is harder to project, is demand driven issues caused by Covid19.
One of the reason’s why this is difficult is that we are still at the very beginning of economic impact with wildly varying estimates of economic damage and impact.
In general, semiconductor laden devices are “less essential” goods than food, shelter, transport & energy (though some may argue they need their smart phone more than food…).
While there may be a near term spike in demand for laptops and servers due to remote work and learning, we are more concerned about reduced demand for TVs, cars, smart phones, 5G etc; as those purchases tend to be more “marginal” and vulnerable to high unemployment or business cutback in spending.
Slowing of semiconductor demand will only be felt over the next several quarters and not felt in Q1 as we haven’t yet seen significant demand driven issues and we have the above described supply chain buffer to delay the impact.
We remain very concerned about the precarious balance of supply and demand in the commodity like memory markets and would watch those with extreme interest. We have already seen some warning signs in memory pricing.
We also remain concerned about the iPhone 12 launch in the fall, which has always been timed for holiday purchases. Getting pushed out by a quarter would essentially miss the holiday window of sales.
We would look to the 2008/2009 financial crisis as a bit of a guide for potential impact on semiconductors, which was significant.
Except for the recent, self inflicted, memory oversupply driven down cycle, the semiconductor industry has been in a positive overall trend since 2008/2009. If we hadn’t over built memory supply, we would likely have still been in the longest up cycle ever.
This most recent down cycle lasted about a year and a half and most prior cycles lasted two years or more.
While the short term, logistics driven impact may only last one or two quarters at most, the longer term, demand/economic driven impact will likely last one to two years.
Right now the depth of the impact cannot be determined but its safe to say that the long term impact will last at least as long as the overall economic impact.
Samsung, Intel & TSMC still spending for now
We continue to hear positive things about spend levels. In fact it sounds like Samsung may be planning on ramping spending in a similar fashion as they did in the prior upturn.
We have also heard that Intel continues to spend to get capacity it has been short of as well as take advantage of near term spikes in demand.
TSMC also continues its roll out of new technology and is remaining on track with prior plans for the most part.
The bottom line is that so far, no major player in the semiconductor industry has taken their foot off the gas (for now).
Between Apple, AMD, Intel, Qualcomm & Huawei among others, TSMC seems to have more than enough demand to keep it busy. Our concern here is that TSMC has broad exposure across the consumer industry and obviously more exposure to 5G roll out which could be impacted.
Samsung is obviously very exposed to memory pricing but in the past has spent up and until memory prices collapsed in their face, then put the brakes on instantly. Samsung behaves in a much more binary way as it seems to be either full on the gas or full on the brakes with not a lot in between.
Intel seems to be a more consistent spender, and if anything, likely too conservative as evidenced by delays and shortages of parts. Of the big three, we think Intel is least at risk to change their capital spending plans and perhaps more at risk for an up tick in spend.
Early Q1 signals mixed- ASML & ACLS
Early signals coming out of the equipment industry are mixed. On one hand we have heard that ASML will miss expectations due to logistics issues of shipping and installing tools which is totally expected and obviously beyond their control. On the other hand we have just heard this morning that Axcelis will exceed the high end of guidance with a great quarter despite Covid19. Obviously shipping and installing scanners is much different from ion implanters and the customer base and locations are significantly different between the two companies.
We think that impact on tool companies will vary depending upon customer locations and complications associated with tools. We think that Axcelis is one of the few companies that will see relatively no impact. Most will see some sort of impact.
In general, materials suppliers remain a defensive bet as they will likely have the shortest term impact related only to any fab slow downs which are few.
Those companies with the widest and longest supply chains that are most exposed to logistics will see the most impact, especially those with more Asia based manufacturing.
The Stocks….Beware the bounce…..
The stocks have bounced off a sharp decline as worst case fears seem to have abated. Initial reports are coming in better than expected and we expect will continue to come in better than worst fears.
We also expect that guidance for Q2 will probably also be better than expected as much of the business pushed out of Q1 will wind up in Q2 so it will make up for any weakness and potentially look better than originally expected for many companies.
As we have pointed out here, we think near term issues are primarily logistics based and by their nature, short term. As such, the stocks will discount these issues as one time, delays in an otherwise intact model. When we add the likely positive Q2 guide the stocks should see a short term “pop”
We are more concerned about business one to two or more quarters out, driven by demand issues.
So while we have experienced a near term “dead cat bounce” off a low bottom we are concerned that the stocks could drift down in the longer run after having a “relief rally” when investors realize that short term impact is just that.
We also remain very concerned about non Covid19 issues, such as Huawei/China trade, which has all but been forgotten about by investors. The current administration could look to China as a scapegoat for Covid19 and try to punish China through Huawei or some other trade impacting mechanism.
In short we may try to take advantage of a short term, quarter driven pop in the stocks but then take some money off the table as the future looks a bit more uncertain post the pop of the quarter.