With many chip stock investors holding massive paper profits thanks to the enormous rally the group has seen since early 2016, it isn't all that stunning that a spate of moderately worrying stories, reports and analyst notes would trigger some profit-taking. Particularly ahead of earnings season.
But outside of a couple pockets of weakness, the concerns raised don't point to a slowdown in end-market demand, let alone suggest the chip industry's current up-cycle is coming to an end.
Taiwan Semiconductor (TSM) , by far the world's biggest chip foundry, raised eyebrows on Thursday with the light Q2 guidance it provided in its Q1 earnings report, along with some of its related comments about customer demand. As telegraphed by monthly sales reports, the company posted Q1 revenue of NT$233.9B ($7.64 billion), up 15% annually but below prior guidance of NT$236 billion to NT$239 billion. EPS of $0.54 was slightly below a $0.55 consensus analyst estimate.
More importantly, TSMC guided for Q2 sales to be in a range of NT$213 billion to NT$216 billion ($7.03 billion to $7.13 billion), down from NT$221.8 billion a year ago and below a $7.37 billion consensus. A strong Taiwanese dollar has much to do with outlook: TSMC says its outlook would be 4% higher if the Taiwanese dollar stayed at Q4 levels, and the company is maintaining full-year guidance for 5% to 10% U.S. dollar-based revenue growth.
H owever, TSMC added its Q2 guidance "reflects a quite severe inventory adjustment from our customers, particularly in the smartphone and PC market." Its shares closed down 1.4% on Thursday. PC chip suppliers Intel (INTC) , Nvidia (NVDA) and AMD (AMD) -- the latter two rely on TSMC for GPU manufacturing -- traded lower as well.
TSMC's report comes after some Apple suppliers traded lower in the wake of a report that Apple is working on a power management IC (PMIC) that would handle functions currently performed by a chip supplied by Dialog Semiconductor. Together with last week's news that Apple plans to stop using Imagination Technologies' GPU core designs in its A-series app processors, stoked fears that Apple will stop relying on additional suppliers in time. In addition, a Cowen report stating Apple is having trouble developing the iPhone 8's below-the-glass fingerprint sensor solution has raised concerns that the iPhone 8 will see a delayed production ramp.
There have also been a smattering of cautious analyst notes over the last couple of weeks for chip stocks that have posted big gains over the last 15 months. Nvidia has been hit with a Pacific Crest downgrade that cited weakening desktop graphics card demand and high inventories, and a cautious BMO note that expressed similar concerns. On Tuesday, analog/mixed-signal chipmaker ON Semiconductor (ON) was hit by a Credit Suisse downgrade that cited a high valuation and historical cyclical trends.
Thanks to these newfound concerns, the Philadelphia Semiconductor Index (SOXX) fell 4% this week to $129.91. It's still up 44% from where it traded going into 2016.
Sifting through all of the reports and numbers, there only seem to be two notable end-markets for which demand seems to be softer than once hoped: Chinese smartphones and desktop graphics cards. And in each of these fields, the downbeat figures given by certain supply chain firms might not look quite as bad with some context.
Along with seasonality and an expected slowdown in iPhone 7-related orders following last year's ramp, slower demand from mobile chipmakers dependent on Chinese OEMs, such as MediaTek, Spreadtrum and Huawei's HiSilicon unit, led TSMC's Communications segment sales to drop 18% sequentially in Q1. BlueFin Research, taking stock of the numbers, says it thinks Chinese smartphone shipments were down 25% sequentially in Q1, worse than normal seasonality, and that smartphone processor/modem suppliers are "still working through inventory issues due to the larger-than-expected market decline."
But some of this decline could be due to a thinning of channel inventory following surprisingly strong Q4 shipments. Research firm IDC thinks Chinese smartphone shipments rose 17% sequentially and 19% annually in Q4, much better than the 9% growth seen for the whole of 2016.
In addition, TSMC's mobile sales could be hurt by Qualcomm's (QCOM) reported Chinese share gains (driven by its 4G modem edge) at the expense of MediaTek and others. Though Qualcomm is a TSMC client, it also depends on Samsung -- responsible for making its Snapdragon 820 and 835 high-end processors -- and Globalfoundries for its manufacturing needs. Globally, share gains by Samsung on account of its Galaxy S8 launch could hurt TSMC, since the S8 relies on the Snapdragon 835 and a slew of other Samsung-manufactured parts.
It's also possible that share gains by top-3 Chinese smartphone OEMs Oppo, Huawei and Vivo are causing inventory buildups with smaller firms -- firms that tend to buy heavily from MediaTek and Spreadtrum. IDC estimates the top-3's Chinese smartphone share grew to 51% in Q4 from 35.6% a year earlier, and reports have suggested their share gains have continued this year.
For the desktop graphics card market, it's worth remembering that Nvidia's gaming GPU sales rose 66% annually in the January quarter, and 63% in the October quarter. A big upgrade cycle related to the company's Pascal-architecture GPUs, together with a hot PC gaming market, fueled massive sales growth in recent quarters. And now we might be seeing the market cool down a bit.
Here, it's worth noting that Nvidia accounts for a big portion of TSMC's PC-related chip sales; Intel produces its own chips, and AMD leans heavily on Globalfoundries. Nvidia is counting on the recent launch of its powerful 1080 Ti and Titan Xp GPUs to prop up demand. AMD, meanwhile, will soon began selling its next-gen Vega GPUs.
Elsewhere, demand conditions remain solid. IDC and Gartner's Q1 PC numbers point to stabilizing demand. Samsung just reported Galaxy S8 pre-orders topped S7 pre-orders. Cloud giants such as Facebook (FB) and Alphabet/Google (GOOGL) are rapidly increasing their capex. And many analog/mixed-signal and microcontroller firms have reported seeing strong demand from automotive and embedded markets, as the hardware their chips go into becomes more intelligent and connected.
And though it is conceivable that big design changes will lead to a delayed iPhone 8 production ramp -- it wouldn't be the first time something like this happened -- it also looks as if Apple is betting on a strong reception. Mizuho, citing supply chain checks, reported last month it believes Apple plans to order 120 million iPhone 8 and 7S units for the second half of 2017, compared with 89 million iPhone 7 units a year earlier.
Meanwhile, the memory industry is for now in the midst of a boom cycle marked by strong pricing and chip shortages. And industry M&A has yielded a stronger pricing and margin environment.
Between the big gains chip stocks have recorded and the group's historical cyclicality, it's hard to blame investors for getting a little jittery in response to negative headlines. The easy money may indeed have already been made for many names. But that doesn't mean the industry's good times are coming to an end.