-Micron off the proverbial cliff and falling faster
-Looking at a much longer/deeper decline in memory
-Layoffs, capex cuts, slowdowns- battening down the hatches
-Micron seems to imply more of a “U” or “L” shaped downcycle
Micron’s numbers as bad as we expected And much worse than most on the street expected
We have been involved with the semiconductor industry for over 30 years and have always felt that upsides are usually more than expected and down cycles are usually worse than expected. All you need a is a little imbalance, in either direction, between supply and demand , and the industry seems to start a run away reaction.
Memory is always the worst given its commodity like nature. Micron suggested we are in one of the worst memory downturns in the last 13 years.
Revenue was off an astounding 39% quarter over quarter as both pricing and demand have collapsed.
We see no signs of it getting any better any time soon and neither does Micron as they announced further cuts to capex to “survival” levels, cuts in wafer production and layoffs of 10%. We had projected the layoffs in prior notes as well as capex cuts.
We again would not be surprised to see it get even worse before any signs of it getting better. While Micron does have cash, its net cash position is not great especially if we hemorrhage cash through increasing losses. Management is clearly aware of this and will obviously take further steps to slow losses.
We remain concerned about Samsung and other memory makers
We are very worried that Samsung and other large memory makers could use the industry weakness combined with their deeper pockets to continue to spend to try to take share from Micron in the downturn. It would not be totally out of character for Samsung to press its size advantage here and now.
Not surprisingly, the number of memory makers in the world almost always gets reduced in down cycles.
Maybe a small reprieve from Yangtze memory risk
We have been even more concerned about the new and upwardly rocketing Yangtze memory in China. They tend to aggressively price at or below a 20% discount to the market to take share. Even Apple was headed in their direction. They clearly want to duplicate China’s takeover in the memory market much as what happened in both LED and solar where non Chinese manufacturers were wiped out by aggressive pricing.
Yangtze has been finally put on the “entity” list (Santa’s naughty list) by the US government, which means they will be starved of equipment. However this may be a bit of closing the barn door after the cows have left town as Yangtze seems to have caught up with Micron and Samsung in technology in leading edge NAND.
We had heard that there was a huge rush of equipment going to Yangtze as equipment makers wanted to ship before the embargo door was closed.
They probably have enough equipment still in crates to unbox for the next year….
The embargo of Yangtze will eventually help Micron but not before they grab further share of the NAND market over the next year or two.
Even Apple has now been scared away from doing business with Yangtze but they have more than enough internal demand inside China to keep their fab running flat out as compared to Micron’s slowing production.
The big question? Is it a “V”, “U” or “L” shaped downcycle/recovery?
It seems fairly clear that the memory market looks a lot more like an “L” or “U” shaped downcycle at best. 2023 will be a weak year and 2024 is obviously in question. Foundry is a big of a mixed story with leading edge weaker due to slow PC/server and high end chips while low end and automotive still needs capacity. The issue for equipment makers is that the part of the market that needs capacity are older 200MM fabs making cheap parts while the memory market, which buys 300MM tools by the boatload is weak.
This obviously does not bode well for a recovery in semiconductor equipment. We have never seen a “real” upcycle without the memory makers participating. With memory maker’s capex weak the equipment market will do little more than tread water.
The bottom line is that memory has to get better before we have a “true” upcycle. Memory also can’t get better just by cuts in production, we have to se demand ticking up….. unlike oil, you can’t cut your way to a supply/demand balance.
For now, it feels like 2023 will be the bottom of the “U” shaped down cycle.
Hair on fire mode
We recently visited silicon valley, meeting with industry participants. We got the sense that manufacturers are still frantically rearranging their order book to cope with the China embargo fall out and other cancellations.
Trying to figure out what’s real and what’s not. We don’t think anyone has a clear handle on what the final, bottom level, of business will look like.
This suggests that we still don’t have a clear idea of where the bottom is. This also implies that we still don’t have a good idea of how long before we get there or how long we stay at the bottom. Once the cancelations and order books stabilize we should get a better idea as to where we have wound up and for how long…. until then, all bets are off.
We see no good reason to go near Micron any time soon. The odds are that things will continue to worsen in terms of production cuts, lay offs, capex reductions and further delays in new projects. We remain concerned about conservation of cash.
This is obviously not a good harbinger for the rest of the industry as Intel cuts and delays along with others. The macro economic picture is not driving semiconductor demand in the near term, at least not enough to stimulate an up cycle.
We certainly remain very positive about the long term prospects for the industry as strong secular , long term growth remains, however the next year or two could be rough.
One of the issues is that the industry hasn’t gone through a “real”, ” cleansing” down cycle in quite some time so many investors and participants think this is just a one or two quarter blip then back to the races.
We don’t think this is a short blip as evidenced by lay offs and production cuts and cancellations that didn’t happen in prior short blips in an otherwise strong growth pattern. This is a definitive direction change.
We would prefer to sit on the sidelines, perhaps opportunistic if something is overdone, but generally out of the semiconductor space. We don’t see any significant good news coming in 4th quarter results and perhaps some more negative surprises such as we just got out of Micron.
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.