Based on how many chip stocks have been trading lately, one would think that every chip supplier and equipment maker is poised to see its sales implode due to weak PC/smartphone demand and/or new China export controls.
But reality is a lot more complicated than that. And as a result, the across-the-board selling happening with chip stocks is creating some buying opportunities.
A look at Advanced Micro Devices' (AMD) Q3 sales warning makes it pretty clear that some chip end-markets remain much stronger than others. The lion's share of AMD's $1.1 billion guidance cut for Q3 is related to its Client (PC CPU) segment, which saw customers aggressively cut inventories amid nosediving PC demand.
On the flip side, AMD forecast sales for its Gaming and Embedded segments would be close to consensus estimates, and that sales for its Data Center (server CPU) segment would be just a little below consensus.
Likewise, though I haven't been a big fan of memory stocks due to how much plunging DRAM and NAND flash prices are weighing on industry profitability, Micron's (MU) earnings call commentary wasn't entirely bad when it came to end-market demand. Though reporting weak demand for PC, mobile and graphics memory (not surprisingly), Micron offered more upbeat comments about server and auto memory end-demand, albeit while noting inventory corrections are depressing OEM purchases for now.
As a result, Micron forecast it would see demand begin to improve in Q2 2023, as inventory corrections wind down, and that -- with the help of low supply growth following capex cuts -- business conditions would gradually improve during the second half of 2023.
Separately, Infineon (IFNNY) -- a German chip supplier which gets a lot of its sales from auto and industrial clients -- continued striking an upbeat tone about 2023 auto chip demand during a recent investor call. Among other things, Automotive division chief Peter Schiefer said (with vehicle production still falling short of demand) demand for Infineon's automotive microcontrollers and EV-related products is expected to exceed supply for all of 2023, and that Infineon expects to continue raising prices next year.
In such an environment, there's bound to be some excess ordering by customers desperate to get their hands on as many chips as they can. And at some point, when supply catches up to demand, some inventory corrections will likely happen. But still, this environment isn't nearly as bad for chip suppliers as what exists in the PC or smartphone markets -- both because there's been a lot of unmet car demand over the last couple of years, and because trends such as ADAS and electric car adoption have been steadily growing the chip content found within the average car.
The story is similar for cloud capex: Though it's possible spending on servers and other data center gear by U.S. cloud giants goes through a digestion period next year after growing rapidly since 2020, it's unlikely to plunge the way that, say, notebook sales have given secular trends such as growing AI-related investments and public cloud services adoption.
With regards to the new export controls imposed by the Commerce Department on chips and chip manufacturing equipment going into China: They're bad news on the whole for the chip industry, but far more so for certain companies than others. A couple of things need to be kept in mind:
- The goal of the export controls is to prevent Chinese companies and organizations from obtaining chips that can be used to build supercomputers and other advanced computing systems that could be used by the Chinese military, and to prevent them from manufacturing certain kinds of advanced logic and memory chips.
- Just how far the Commerce Department goes to pursue these goals depends a lot on how it chooses to interpret and enforce various new rules.
The rules are a negative for Nvidia (NVDA) , which won't be able to sell its most advanced server GPUs to Chinese end-customers, and for a memory-exposed chip equipment maker such as Lam Research (LRCX) , which will probably see its sales to Chinese memory makers fall meaningfully. But they could be a positive for memory makers such as Micron and Western Digital (WDC) , and perhaps also for a foundry (chip contract manufacturer) such as Globalfoundries (GFS) , to the extent that it's left in a stronger competitive position relative to Chinese rivals.
And a lot is still up in the air. For example, though Chinese companies might not be able to directly buy Nvidia and AMD's most advanced server GPUs, firms that want them for non-military purposes -- for example, to develop a voice assistant or a product recommendation system -- might still be able to access the GPUs via cloud services. And when it comes to memory fabs that are located in China but owned by non-Chinese firms such as Samsung and SK Hynix, the Commerce Department says it will review requests for advanced equipment on a case-by-case basis.
To sum things up, the massive, across-the-board selling that chip stocks have seen -- some of it apparently from investors convinced that the entire chip industry is just a pandemic-era beneficiary that's going to see its sales and profits fall back to around pre-COVID levels -- strips out a lot of nuance from a complicated situation.
Some chip developers and equipment makers are indeed poised to have a tough time in the coming months. But thanks in part to secular tailwinds, many chip developers whose sales skew towards auto, industrial and/or cloud end-markets might only see moderate top-line headwinds, and the same might go for some chip equipment makers with limited memory capex exposure. Think companies such as Marvell (MRVL) , Analog Devices (ADI) and KLA (KLAC) .
Nonetheless, in spite of this complicated reality, valuations for all kinds of chip companies are now at levels last seen around December 2018 -- another point in time when chip stocks were sold off across the board amid fears that a massive industry downturn was on the way. Buying quality chip-industry names back then generally paid off very well. And so might doing so today, at least in the case of some better-positioned firms.
