The chip industry is suffering from a severe crisis that mainly stems from the global slowdown and the sharp drop in demand for personal computers.
According to IDC data, worldwide PC shipments fell 15% in the second quarter from a year earlier, after a 5% year-over-year decline in the first quarter of this year. At the same time, according to a study by the investment bank Citi, PC products and smartphones make up about 50% of the total demand for chips, so declines in computer sales and the deterioration of demand mean fewer chips are required.
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As a result, the giants in the field reported one after the other about lowering forecasts and suffered a sharp drop in the value of the stock, and Intel will probably even start a process of cuts. Last weekend another blow hit the industry.
The world’s largest chipmaker, Taiwan’s TSMC, posted seemingly good reports and beat forecasts, but also gave investors and the industry cause for concern. The company announced a significant cut of 10% in the expenditure forecasts (CAPEX) for investment in equipment and factories for the current year. The latest forecast stands at 36 billion dollars compared to previous estimates that reached 40 and even 44 billion dollars. In addition to this, the company also fears the political struggle between China and the US and the market is preparing the ground for further reductions in the company’s expenses.
In addition, chip equipment leader Applied Materials also lowered its forecasts for the coming quarter at the end of the week. Revenue forecast was lowered from $7.05 billion to $6.25 billion. The reason for the downloads is not related to the economic situation, but to the regulatory prohibition in the United States to supply China with advanced technology products for the chip industry. The company estimates a negative impact of about 400 million dollars in the next quarter as well. On the face of it, these two companies are not related, but may oppress the entire sector.
“The decrease in demand will also reach the servers”
Sergey Vaschunok, a senior analyst at Oppenheimer, explains in a conversation with Globes that the market is directly affected by the global slowdown. “The chip market is in a high correlation with the general growth. It always has been and always will be. The equipment market for chips is even more in a high correlation. If there is a general decrease, then there is a decrease in the demand for chips.”
“The chip market is not a uniform market – they have many, many segments. Half are in decline over time, some are growing,” adds Vaschunok and clarifies that the two most important segments in the chip market, which hold the majority of the market, are the computing and cellular markets: “These are mature markets, markets that there is no growth there. Everyone has a phone and a replacement cycle, there is no reason to replace a device every year.”
Part of the sharp decline we are now seeing in the market is due to the sharp jump that took place during and after the corona epidemic, Vaschunok explains. According to him, the current decline in demand for personal computers will not stop there and will also reach the market for cloud services and corporate services. “The decline will also reach the servers. The cloud companies have invested a lot of capital in building the infrastructure in the cloud, I am not saying that it is going to stop, but it is possible that the growth rate will be low compared to what we have seen so far,” Vaschunok describes.
Profit warnings and layoffs are coming
As mentioned, these are not easy days for the industry. Just recently, AMD announced that it would not meet its early forecasts for the current quarter, citing the impact of the decline in demand for personal computers and smartphones. The expectation is to miss more than a billion dollars in the company’s revenues.
“The PC market weakened significantly in the quarter,” said AMD CEO Lisa Sue. “While our product portfolio remains very strong, macroeconomic conditions resulted in lower-than-expected demand for PCs and significant inventory correction throughout the PC supply chain.”
And these were not the only hard news that landed this week on the industry. The largest employer in Israeli high-tech, the American giant Intel, will probably soon embark on a global cutback plan that will include layoffs of thousands of workers, also in Israel. As reported in Bloomberg, Intel is expected to announce with the publication of the financial reports at the end of the month a wave of global layoffs that will include thousands of employees. In some departments in the company, such as the marketing and sales department, the number of employees will shrink by up to 20%.
At the end of last July, Intel announced a shift from profit to loss in the second quarter, a $2.7 billion miss in forecasts and an earnings per share that was low compared to analysts’ forecasts. The revenue forecast for the entire year was cut to 65-68 billion dollars, compared to the previous forecast which stood at 76 billion dollars, and the client computing sector decreased by 25% in revenue and 73% in operating profit, against the background of the weakness in PC demand. In early August, AMD said the PC market was weaker than it expected, too.
Analysts’ forecasts for the near future
More than $800 billion has been cut from the market value of the major US chipmakers since the start of 2022. The performance of stocks in the industry over the past year is not encouraging for many: stocks Nvidia and-AMD have fallen since the beginning of the year by 63%, and a share Intel Dropped by 51% since the beginning of the year. The SOX index of the Philadelphia Stock Exchange has plunged 45% since the beginning of the year and is showing its worst performance this year since 2008.
What is expected next? Shahar Karmi, the technology analyst at Psagot Investment House, was interviewed by Globes this week and provided predictions. “In the field of memory chips, the situation is challenging; these companies – Micron, SK Hynix and Samsung, were the first to ‘take the hit’, and in my estimation will also be the first to recover.” Karmi estimates that the analysts’ forecasts for the next quarter as a whole have not yet been reduced enough, and the consensus is too high. “We still have a long negative way to go,” he says. “Usually, in chip cycles, the stocks don’t wait for the performance and react beforehand. The stocks have been falling for six months, now the performance is coming, and in the next phase the future forecasts will be bad. Then, the stocks will start to rise, even before the improvement in the performance. But there is at least more to this A quarter or two, and it very much depends on the global macro. So right now we are pessimistic about the industry, but in the long term – we are optimistic.”
Sergey Vaschunok emphasizes that one should pay attention to the differences between the companies’ warnings. “Companies like Nvidia and Applied Materials have issued profit warnings because of the trade war between the United States and China as mentioned. AMD for that matter will be the combination of the two, both the trade war and the macro issues,” he said.