That in and of itself isn't something for chip stock investors to panic over. The industry has seen pretty healthy growth over the last two years, valuations are already pricing in some bad news and periodic inventory corrections have been a fact of life. Moreover, as was the case for the downturn seen in late 2015 and early 2016, many of these corrections only lasted two or three quarters, and produced moderate sales declines rather than massive ones.
However, what's different is that this particular downturn comes amid escalating trade tensions between the world's two largest economies. The uncertainty surrounding these trade tensions is clearly making a lot of risk-averse investors head for the sidelines for now, particularly since some firms are reporting that their Chinese chip orders are under pressure.
Texas Instruments, the world's biggest analog chipmaker and also a major supplier of microcontrollers (MCUs) and other embedded processors, is down over 4% on Wednesday after posting mixed Q3 results (an EPS beat, but a miss on revenues) and offering light Q4 guidance. Specifically, the company guided for Q4 revenue of $3.6 billion to $3.9 billion, implying roughly flat annual growth at the midpoint, and below a $3.99 billion pre-earnings consensus.
Notably, TI said in its earnings report that "demand for our products slowed across most markets." On the earnings call, management declined to single out any particular region or end-market as being especially responsible for the slowdown.
"[W]e believe [the downturn is] mostly driven by a slowdown in the semiconductor market just after several years of strong growth," IR chief Dave Pahl said on the call. "It doesn't preclude that there aren't other things and other factors and macro things that are going on. Certainly as the quarters evolve, those things will become more obvious of what role that they'll play."
STMicro's commentary was a little different. The European chipmaker's shares were down over 12% on Wednesday after it beat Q3 results but issued a Q4 sales outlook that was below consensus at the midpoint. STMicro expects revenue in seasonally strong Q4 to rise 5.7% sequentially, plus or minus 3.5 percentage points, compared with a consensus for 7.5% sequential growth.
On his company's call, STMicro CEO Jean-Marc Chery reiterated early-September remarks about seeing softening Chinese demand. He also noted that lead times for fulfilling MCU orders have shortened, and that this has sparked an inventory correction.
When asked which end-markets are under pressure, Chery indicated that a number of them were, including ones for industrial, consumer and white-label goods. Separately, STMicro President Marco Cassis said that Chinese chip demand at the point of sale (POS) was now flat, rather than growing.
TI and STMicro aren't the only major chip industry firms to report seeing some clients pare their orders. Last week, top chip contract manufacturer (foundry) Taiwan Semiconductor (TSM) noted it's seeing inventory adjustments at some firms that are expected to last into the first half of 2019. And last month, memory giant Micron (MU) mentioned it's seeing "limited" inventory adjustments at select clients. A month before that, MCU and analog chip supplier Microchip Technology (MCHP) mentioned that trade worries were impacting its sales to some clients, such as smaller Chinese hardware makers.
It's worth noting that there were some silver linings within TI and STMicro's commentary. STMicro, which came out looking good in iPhone XS teardown reports, suggested its smartphone demand is tracking with prior expectations. That follows upbeat comments from TSMC, which manufactures Apple's (AAPL) A-series system-on-chips (SoCs) and also services Apple chip suppliers, about the demand it's seeing from the high-end smartphone market for chips based on its next-gen 7-nanometer manufacturing process.
TI, which is also an iPhone supplier, reported that its sales to "Personal Electronics" customers (Apple is one of them) fell by a mid-single digit percentage annually, but added that sales to some of these clients grew. The company also indicated that the start of 5G network buildouts is boosting its analog chip sales to the telecom equipment market. Those remarks follow an upbeat earnings report from mobile infrastructure giant Ericsson (ERIC) .
And both TI and STMicro mentioned that automotive chip demand remains fairly healthy overall, despite being impacted some by the recent downturn. Rising chip content per car remains a long-term growth driver for both companies, as well as many peers.
Meanwhile, Amphenol (APH) , which supplies products such as cables, connectors, sensors and antennas to numerous end-markets, is up over 2% today after beating Q3 estimates and issuing above-consensus Q4 guidance. On its call, Amphenol noted it's seeing solid demand from the smartphone, auto, industrial, military and mobile infrastructure markets.
With the shares of many chipmakers having already fallen sharply this year prior to TI and STMicro's reports, a lot of cyclical worries have already been priced in. NXP Semiconductors (NXPI) and Cypress Semiconductor (CY) , rivals to TI and STMicro, now both trade for just 9 times their expected 2019 EPS. Even if EPS estimates need to be taken down some, downside looks fairly limited at current levels.
Investors might also want to keep an eye on chip developers whose shares have fallen hard during the correction, but which have limited exposure to the markets reported to be seeing meaningful inventory corrections. This list includes iPhone chip suppliers, and perhaps also firms such as AMD (AMD) and Nvidia (NVDA) .
At the same time, it wouldn't be surprising to see the chip sector in general remain under pressure in the coming weeks, as trade worries persist and near-term estimates are taken down for many names. Long-term buying opportunities exist in an environment like this, but taking the plunge requires a strong stomach for handling near-term volatility.