Apple as Apex of chip industry portends weaker 2019

On the first day of trading in the new year Apple just announced, after the close, that revenues will be lower than previously expected coming in at $84B versus the expected range of $89B to $93B and analyst estimates of the current quarter at $91.5B. Ugly….. The blame was laid squarely on China as slowing sales and trade tensions took a their toll. This is down roughly 7% from where the company thought revenues would be just 60 days ago. A bit of an embarrassment….

We have been talking for a long time about the China risk in tech and pointed out that companies in China were paying employees to buy smart phones from Chinese companies rather than Apple due to the tensions between the two countries.

This should come as little surprise as things have been slowing for a while and the Santa Claus “pop” in the stocks had no basis in reality, just wishful thinking (which didn’t last long…).

The real problem is that Apple is the driver of the vast majority of the semiconductor ecosystem and the impact of the Apple China slowdown hitting the already reeling chip industry will only exacerbate the problem.

Apple is the primary driver of TSMC and the bleeding edge of Moore’s law as TSMC follows Apple’s yearly processor demands. Obviously communications chips as well as memory, both DRAM and NAND will be negatively impacted.

As the de facto Moore’s law driver and one of the biggest consumers of chips Apple is the at the Apex of the semiconductor food chain.

Its likely that the trickle down of Apple’s China Chop could be worse for Apple’s suppliers and the Chip industry than for Apple itself.

Some investors and analysts had been suggesting a quick bounce back from this cyclical downturn but we have remained concerned over Chinese “cloud” hanging over the industry. While not a full blown hurricane from a trade war we are none the less seeing the weather worsen quickly.

The Apple news will not only drive tech stocks and the broader market down but will also make it that much harder and longer for the industry to recover. For those hoping that trade negotiations will result in success in 90 days, we wouldn’t hold your breath. Even if we do get some type of a deal that leaders can brag about, much of the damage has already been done as Apple sales will likely never recover to prior rates in China now that the company has been tarnished as the face of American tech dominance to be punished. The governments can sign whatever deal they want but getting Chinese buyers fired up again for Apple, will not be as easy as a signature.

Very long trickle down impact
The trickle down impact list is too long to enumerate here but is pretty obvious. We are most concerned about the memory portion of the chip industry as it is hyper sensitive to the delicate balance between supply and demand and a whole lot of demand just went away. Memory pricing tends to be non-linear as small imbalances can cause large swings and the memory market tends to trade like a commodity market.

On the other end of the spectrum, we don’t think that the slow down will change the cadence of new processors and technology at the bleeding edge of Moore’s law that Apple drives. Apple will still expect and demand that TSMC keep up its pace and spending so that it can roll out an ever faster Iphone every fall. The only difference is that TSMC will make slightly fewer chips but probably needs all the same new tools to keep up.

Communications chips are somewhere in the middle where technology improvements needed to get to 5G probably overwhelm near term market softness as all participants will keep their foot on the gas to get a slice of the 5G pie (just at a lower volume….). Intel is obviously impacted given their exposure to Apple.

Memory could be bad for all of 2019….
On Christmas day there was a report out of Korea that Samsung was looking at further cuts in their memory fab plans. This Apple news will likely make them cut their plans even faster than before.

Further Samsung Memory Cuts

LRCX and AMAT will be hit harder than KLAC & ASML
Given the huge memory and Samsung exposure of Lam and to a slightly lesser extent Applied, they will bear the brunt of further slowing of the memory industry caused by Apple.

In general, equipment, and those companies that make equipment more related to capacity rather than technology will bear the brunt of the trickle down.

KLA and ASML are more tuned to Moore’s Law and logic devices and less exposed to memory which has already been hard hit.

To be clear, everyone in the semiconductor ecosystem will be hurt, just some more than others

Micron, the stock, is still very cheap, and getting cheaper
Perhaps Micron saw the writing on the wall better than Apple did and put the brakes on spending and expectations a bit earlier. On a relative basis the stock is very cheap but the news is very bad.
We want to be buyers at these levels but catching falling spears is not our sport…..

Equipment stocks
We have been negative on the stocks for a while and we think LRCX could test our $125 target and AMAT could easily test $30 again.

We don’t see a lot of positive data points in the near term and its going to be very hard if not impossible for semiconductor companies to fight the tape and put out positive expectations on their quarterly calls coming up in a few weeks especially in light of this negative Apple news and pronouncements on China.

On the other hand there is also not a lot more negative news other than the failure of trade negotiations and imposition of more tariffs leading to a bigger trade war…..then it would be a nuclear winter for all tech stocks and the overall market, not just the Apple food chain

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