Increasing Semiconductor Revenue Risk

 |  Includes: AMAT
by: Wall Street Strategies

By Carlos Guillen

Semiconductor industry revenue has continued to hold on despite weak macroeconomic fundamentals. Stubbornly elevated unemployment rates, high fuel costs, sluggish consumer spending and delayed supply chain effects from the Japanese earthquake in mid March have not knocked down semiconductor industry revenue, yet that is.

It is clear that the pervasiveness of electronics through all sectors of the economy is creating a feedback loop that is amplifying demand for semiconductor components that are smaller, faster, and more efficient than ever before. Although I am cautious in my expectations for growth this year, I am still bullish on the semiconductor industry, and in light of earnings results and forecasts from a number semiconductor industry heavy hitters, I still believe the semiconductor industry in on track to meet my 10 percent revenue growth for 2011.

The most recent data from the Semiconductor Industry Association (SIA) raised some caution as it demonstrated that the month-to-month revenue growth rate during the April quarter was below the seasonal trend. In fact, the three-month moving average (3MMA) global semiconductor revenue in April declined slightly by 0.16 percent, which was lower than the seasonal rate that calls for an increase of 1 percent during the period. From a level perspective the 3MMA global semiconductor revenue in April decreased to $25.2 billion from the $25.3 billion achieved in March, representing a year-over-year increase of 6.25 percent.

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Although a semiconductor equipment manufacturer, Applied Materials (NASDAQ:AMAT) was able to provide the latest view into the semiconductor market late in May. Overall, the company delivered quite impressive fiscal second quarter financial results, generating strong top and bottom line results. However, I was left a bit concerned with how fiscal 2011 will turn out for Applied. The company essentially reiterated its revenue and earnings expectation for the year; however, it added a word of caution, saying that it will need a stronger than anticipated fourth quarter performance and that achieving this will depend on strengthening consumer demand. However; despite seeing increasing risks to macroeconomic fundamentals, management was confident enough to essentially reiterate its full year revenue and earnings per share targets of over $11 billion and $1.50, respectively.

Although I am turning cautious on the semiconductor business as a result of macroeconomic risks, I also see other forces that will likely favor the business. For one, the explosion in demand for high-end smart-phones and tablets around the world will continue to provide support. Improving emerging market economies are also a huge driver for electronics demand. And, in order to have all these devices running smoothly, infrastructure investments will also be required. In addition, most of the new technologies are beginning to be built at smaller nodes, which will require higher capacity investments for smaller node processes. Other contributing factors should come from automotive electronics, increasing connectivity in the home, LED lighting, upgrades in communication infrastructure driven by 4G networks, and of course expansion in cloud computing. As such, I continue to see semiconductor revenue growth of 10 percent for this full year, with June quarter increasing 4 percent, a bit stronger than seasonal growth.