Smith Market Blog

Sound or Troublesome Numbers for Semi Inventory?


It's been almost two months since financial analysts began to seriously mull over the slip in technology stock prices and the rise in (and/or relationship with) semi inventory levels, as exemplified by this Wall Street Journal article.  Granted, that's not exactly the numbers nor data we tend to go by for forecasting semiconductor and electronics industry actual trending, but at this juncture in the mid-year cycle and pre-3Q11 (hopefully) cyclical high, it's worth considering all of the data that are out there.

iSuppli recently re-released an earlier report on semi inventories' continued climb (since 1Q11).  While iSuppli offers some concern over this slight build, they also hedge their bets based on cyclical trends and the continued demand for "popular consumer items like smartphones and tablets, as well as for perennial reliables such as PCs."  Furthermore, iSuppli analysts propose that the inventory builds are not only within reason for the cycle, but that "[A]t current levels, semiconductor supplier inventories remain appropriate for projected demand, and will be reduced in the upcoming two quarters as demand softens," according to the original report available here.

Other industry analysts, as cited in this ElectroIQ article, have also recently released inventory metrics showing levels are slightly above industry and/or individual company averages for this point in the annual cycle.  As the article offers from the interviewed sources, presently there is a wait-and-see approach because inventory levels are averaging only slightly above norm.  The slight increase is seen as easy to correct in the event of demand underperformance in 3Q11.

Another data point comes from bell weather company TSMC's chairman, Morris Chang, who earlier in June cut by almost half (from 7% to 4%) the growth forecast for TSMC, see this post by ElectroIQ. Today, TSMC and UMC's provided their 2Q11 reports, showing modest month-over-month decreases but a year-over-year increase in revenue and flat trends for the quarter-over-quarter data (see the article in DigiTimes 7/8/11).

Earlier this week, Samsung came in as the first of the tech giants to provide their 2Q11 results, albeit with mixed news (see here from WSJ and here from Bloomberg). While critical to understanding the Samsung slump for 2Q11 is the mix of data from the chaebol's many divisions.  Specifically, Samsung's smartphone and tablet sectors most likely buffered the losses incurred from LCD and flat panels, but Samsung does not provide individual division reports.

Why Samsung and TSMC company reports are important is because of their size and market impact, they provide solid, early indicators of what to expect from the wave of 2Q11 reports that are due in, below guidance sales and revenues, as commented on further here by Forbes.

Furthermore, there is concern from financial analysts that the second half of 2011 (2H11) through early 2012 may continue to be a soft period for semi due to the ongoing external (macro-economic) pressures negatively affecting sentiment by consumers and corporations for tech spending (see this forecast from Semico).  Not only do these demand-weak conditions affect sales, they trickle down to affect the internal sentiment of even the largest electronics OEMs, as explained here by Forbes. What does that mean in terms of an on-the-street effect?  It means we might expect to see order slowdowns mirroring the wait-and-see approach of these OEMs' corporate customers as well as CAPEX cuts and equipment orders and expansion plans curtailed for up to a few quarters.

Unfortunately, this morning's announcement by the U.S. Labor Department that job creation was nearly stagnant coupled with rising unemployment and housing bad news is not the kind of data that is going to support stronger 3Q11 sales and revenue for semi.  In fact, the take-away is bleak, as summarized here by WSJ: "the [U.S. ] labor market will take years to recover." (See here from WSJ and here from Bloomberg for just two of the global press sources covering the US news this morning.)

In spite of this gloomy news for a Friday, the strength of demand for smart wireless devices (SWD) from consumers globally as well as the steady and rapid growth in cloud services at the enterprise and consumer levels provide important opportunities for semi strength as we move through the present economic pressures.

Lisa Ann Cairns, Ph.D.
Written on Friday, 08 July 2011 10:51 by Lisa Ann Cairns, Ph.D.

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