More Negative Semiconductor News

The amount of negative news and information about the semiconductor industry seems to be increasing at a faster rate. Micron put up a better quarter than expected but more importantly guided less than expected. We are surprised that the street is surprised as the decline in memory pricing is well known and Micron has been clear about it. It seems like investors and analysts may not be paying attention or hoping that reality isn’t true. Even if Micron’s earnings get cut in half, its still trading at a low valuation. Investors seem to be pricing in a downside disaster.

There is also a report in the news that Samsung will cut back on memory production in 2019 in order to prop up pricing in the face of slowing demand. Demand is still up just not up as fast as expected. We have written several reports in the past about our “OMEC” (Organization of Memory Exporting Companies) idea and Samsung is the Saudi Arabia of the memory industry. It does have the power to prop up pricing by adjusting supply. It may not be a bad thing for memory makers not such much for memory users.

The problem is that if Samsung is planning on cutting memory supply growth in 2019 it obviously is also going to cut chip equipment purchases even further as there is not a reason to buy equipment to increase supplies further. This also belies the idea of a one quarter downturn, for the September quarter, that some equipment companies and analysts had stated as fact.

Our recent checks indicate that the December quarter for chip equipment is weaker than suggested last quarter and perhaps even weaker for fabrication equipment than the recent “walk back” by KLAC.

We think that the December quarter for LRCX, AMAT and TEL will likely be down, perhaps another 10% sequentially rather than the “positive trajectory” Lam had called for on their last conference call, which would have supported September as the trough quarter.

We are more firmly of the view that September is not the trough and that there is probably further downside from there. At this point we think its difficult to call the trough or bottom as the news flow continues to be negative.

LRCX back track?
We think that Lam will likely have to back track on their September trough comment. At best they may be able to pull business into December to make it look flatter but we think things have deteriorated since their last update. We have been suggesting that $150’s has been a “trough” for the stock but we could potentially break through that support level depending on the level of capitulation. The recent comments attributed to Samsung pulling back on supply add to the risk as they may make the September equipment delay become a cancellation.

Global Semiconductor Alliance Executive Forum
This past week when we were is silicon valley, the GSA held its executive forum of “C level” types from the chip industry. We have heard from several people that the tone and outlook at the conference was much more muted.
It sounds like the consensus is for chip growth to slow from its 20% prior pace to a more leisurely 0% to single digit % rates.

We don’t think this is as bad as some investors may react as memory has been at an unsustainable pace and the expectation is still positive rather than the historical cyclicality which goes more negative in down cycles.
Our sense is that most, if not all, of the cooling has been on the memory side of the industry with foundry/logic being relatively fine.

Monterey Masks
This past week also saw the SPIE photomask and EUV Lithography conference in Monterey. It sounds as if things are progressing very well on 7NM. We have heard that there are a lot of 7NM”tape outs” that will likely build a good backlog of leading edge product. EUV continues to make progress towards a more HVM like model though it still has the well know issues of resist & pelicles etc;.

Lasertec Mask Porn
We heard that Lasertec of Japan showed some racy EUV mask images at SPIE from their mask inspection tool. Mask inspection remains one of the aforementioned issues and it would appear that Lasertec continues to make progress on that front and has come out of “stealth mode” a bit by publicly demonstrating capabilities.

Seen on EBAY- “Two lightly used ASML 3400s, best offer, pick up only”
Now that GloFo has officially canceled their 7NM program there are some idle, hardly used 3400 ASML EUV scanner collecting dust in Malta. There is also a 3300 that was an early tool which is also turned off. It seems a shame to waste these tools and we assume they will find a new home elsewhere. Maybe someone in China will buy them to jump to the head of the line rather than wait for ASML to build a new tool.

This could potentially impact ASML’s delivery schedule or build schedule if they replace tools already in the build queue for another customer. This may reduce the EUV tool count in the near term.

Is Micron dropping out of EUV?
The 3 ASML tools at GloFo may not be the only EUV scanners available. We have heard that Micron may be dropping out of the EUV program and shutting down its ASML 3300. That would bring the number to 4 dead EUV tools.

This may further add to EUV questions but it shouldn’t. We are not surprised as we have never expected Micron to use EUV as memory makers just don’t need it and can’t cost justify it, not today anyway. It was likely a nice R&D program that Micron can shut down to save costs as memory pricing weakens. It just adds another tool to the used tool market. I wonder how much it costs to ship an EUV tool to China? Probably a lot as it takes a $10M crane just to load it into the fab.

The stocks
We don’t see a lot of positive news this past week that suggests a quick bounce back. We think the stocks remain under pressure and could see another down leg after reporting the September quarter. We don’t like being part of the “spear catching” competition in the market and continue to view the downside risk as much larger than the upside potential of most of the stocks.

We still think Micron is cheap and has gotten cheaper but don’t want to put new money to work fighting the tape. KLAC is probably the best defensive play in chip equipment especially after its correction.