It should come as no big surprise that Samsung will miss its Q4 numbers. The company pre announced that profits will be 10.8T KWON (about $9.7B ) versus the 13.2T KWON analysts had predicted, close to a 20% miss. This number is also down about 39% sequentially. Revenue at 59T KWON instead of expected 62.8T KWON and down about 10%. The company blamed the miss on weak memory pricing and a more competitive smart phone environment.
This should not be a shocker to investors. The bigger shock is why, like Apple, analysts didn’t heed the many, many warning signs and cut number ahead of the quarter. The miss will likely drown out most of any positive tone coming out of CES this and dampen stocks that had started to recover from Apples bombshell.
TSMC warned about smart phones a long time ago and Memory pricing declines have been evident for a long time as well. Even if you don’t follow memory pricing on a daily basis, Micron talked about the weakened environment on their call.
Importantly for Samsung, the report clearly points out where their bread is buttered. Revenues only down 10% while earnings are off closer to 40% says that the memory chip business is highly profitable and likely one of the only things making any real money for Samsung. Its obvious that the vast majority of Samsung’s profits come from its chip business and the smart phone business is just a vehicle to sell more chips.
Its also clear that the report out on December 25th about Samsung reconsidering its chip investments will likely result in further reduced capex as putting any more memory chips on the street right now would completely crater pricing. If anything we might expect Samsung to slow production to match demand and hope that others, such as SK Hynix, Toshiba and Micron follow suit.
As fast as Samsungs memory spending went up …. it can come down even faster. We are also in Q1 now which aside from Chinese new year is also the weakest quarter of the year as it is a bit of a post partum depression from the holiday shopping binge (not) this season. This suggests to quick turn. At this point it seems that weakness, at least on the memory chip side , will last well into the year, if not to the end or beyond.
So much for the “one quarter air pocket”
We feel sorry for some analysts and investors who swallowed the “its only a one quarter air pocket” put out by a number of companies earlier in the year. Cyclical downturns, wether memory or logic driven, never last only one quarter as it takes a fair amount of time for excess capacity to be used up, idled or burnt off.
The news out of Samsung and Apple hits both memory and logic so the downturn is clearly both halves of the industry and as such will likely last longer.
If we assume the weakness started in the middle of 2018 (maybe earlier) its going to be minimally a year and realistically one and a half to two years at a minimum.
Could $50B in WFE capex become $40B?
Given the chart of capex spend in the semiconductor industry, its clear there was an unusual uptick beyond the normal inflection of spend. We could attribute a lot of this to 2D to 3D NAND conversion and some early EUV spend but a lot was just plain over capacity which will go away. We would not be totally surprised to see The $50B WFE capex shrink to a number closer to $40B…….
Companies will need to “reset” the bottom quarter
Lam had previously suggested that September was the “bottom” quarter. AMAT, smartly, has not yet called a bottom as its clear that its not. KLA talked about a “bounce back” in December then had to walk that comment back.
Given that Lam is all about Samsung and memory, unfortunately, Tim Archer may have to reset Lam’s “bottom quarter” statement on the December call as his first public outing as CEO. AMAT which is likely second in line of negative impact from Samsung probably just guides down a bit more. KLAC and ASML are more removed from Samsung memory but will have negative impact just the same.
Its likely that we may have another down leg just as the tech stocks were starting to get over the Apple news. Its very hard to make a positive case for anything semiconductor related given that both memory and logic are down and the two largest consumers of chips, Apple and Samsung at about 10% each of the world chip market, are suffering.
It comes down to how long and how far down…..the stocks seem to keep hitting a resistance level which tells us we are near the bottom. The problem is that we could bounce along the bottom for quite some time.
If we wanted to stay involved with semiconductors (not that there is a good reason to do so…) we would look at names that are more logic oriented or outside of the core bleeding edge technology market.
In a perverse way. Intel’s lack of mobile exposure (with the obvious exception of modems) makes it less impacted than Samsung.
Who knows….if memory falls far enough maybe Intel could regain the mantle of the largest chip maker in the world. A title it lost to Samsung in the memory run up.