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RBC's Doug Freedman has downgraded the chip sector to Market Weight from Overweight, citing inventory issues, poor PC and telecom equipment demand, and a softening Chinese market. "The current cycle is unique in that semis have contracted three quarters only to exhibit one-quarter of recovery," says Freedman. INTC, ADI, TXN, and NVDA are receiving downgrades, though BRCM is getting an upgrade on expectations of rising chip content within the platforms it's a supplier for.
The next iPhone (AAPL) could single-handedly account for 4.4% of the chip industry's 2013 sales, says RBC's Doug Freedman, who estimates 171.7M units will be sold next year. Among the expected beneficiaries: Qualcomm (QCOM), whom Freedman thinks will obtain $18 per iPhone shipment; Broadcom (BRCM), expected to get $6.50/iPhone; and SanDisk (SNDK), expected to get $9.50/iPhone if its NAND flash chips are used (previous).
Chip inventories remain at moderate levels, notes Susquehanna: the firm estimates customers held 29.7 days of inventory in Q2, a low number in light of weak consumption. Moreover, while chip sales have been outpacing consumption in Q2 and Q3 (in-line with seasonality), that trend is expected to reverse in Q4 thanks to Apple and Windows 8 product launches. Susquehanna recommends buying chipmakers with strong Apple exposure, including BRCM and QCOM. (Goldman)
Applied Materials (AMAT +1.5%) has turned positive in spite of providing dismal guidance and bookings data to go with its FQ3 beat, and getting downgraded Susquehanna and CLSA. Huge stock buybacks, a rock-bottom valuation, and hopes for a year-end rebound are probably helping. Needham (Hold) is worried a recovery won't include orders from memory makers, and also doubts AMAT can outperform its peers. Chip stocks are doing well today (SOXX +1.7%). (transcript)
Freescale (FSL +10.9%), LSI (LSI +5.8%), and Applied Materials (AMAT +4.9%) lead a major rally in chip stocks (SOXX +2.6%) after Goldman upgrades the companies. Discussing Freescale, Goldman argues downside to estimates is limited given soft guidance and a lean supply chain, and (more importantly for peers) the firm expects EPS to be "up significantly" in 2013 and 2014 thanks to a new chip industry up cycle. MU +5.4%. NXPI +5.8%. MRVL +4.8%. ATML +5.9%.
Beaten-down chip stocks are rallying (SOXX +2.9%) thanks to pleasing reports from Broadcom, STMicroelectronics, Altera, and others. Interestingly, many Apple (AAPL -4%) suppliers, off initially on the FQ3 miss, are also gaining - even Cirrus Logic (CRUS +3.5%), which has 60%+ exposure. Two possible implications: the Street thinks Samsung will make up for any iShortfall, and/or it's less bothered by Apple's iPhone shipments per se than its margin and ASP declines. (more on AAPL)
Though chip stocks rallied strongly earlier this week in response to Intel and Qualcomm's Q2 reports, MKM's Daniel Berenbaum cautions against getting too excited. Other names with broad industry exposure, such as Xilinx, Cypress, and Fairchild, posted more disappointing results, and the industry won't see chip buyers fully replenish their inventories for a while. (TSMC)
TSMC (TSM -2.3%) closes lower after missing Q2 estimates. As the world's biggest chip foundry, TSMC's performance can shed a light on broader chip demand. The company is guiding for Q3 sales to grow 6%-8% Q/Q, largely in-line with estimates, but also cautions distributor and customer inventories are high, with the former expected to reach 12 days above seasonality by the end of Q3. An inventory correction is expected in Q4, though TSMC is still guiding for above-seasonal performance.
Chip stocks are staging a big rally (SOXX +3.5%) thanks to Intel's (INTC +3.7%) better-than-feared Q2 report and guidance. Deutsche and Credit Suisse think Intel is setting the bar low for 2H12, and UBS expects rising server CPU and ultrabook sales to keep margins healthy. However, other firms express worries about macro conditions, a strong dollar, and slowing emerging markets growth. (more) (transcript)
Chip stocks underperform (SOXX -2.1%) after Nomura's Romit Shah says his firm "cannot make a fundamental argument for being long any semiconductor stocks in today’s environment." On a relative basis, Shah recommends buying Apple component suppliers. Some chipmakers with heavy Apple explosure: CRUS, OVTI, SWKS, TQNT, BRCM. Deutsche made the opposite call on chip stocks yesterday.
Deutsche's Ross Seymore is the latest analyst to slash estimates for Intel (INTC) ahead of Tuesday's Q2 report. Seymore, citing macro worries, is also cutting estimates for Texas Instruments (TXN) and Broadcom (BRCM). But the cuts are fairly small in scope, and he thinks chip stocks, which have underperformed the S&P this year, are due for a rally. (previous) (AMD warning)
Global chip sales fell 2% Y/Y in May, the SIA estimates. That represents a reversal from April's 3% gain, and is the starkest evidence yet that the chip industry's recovery has stalled thanks to a mixture of soft IT spending and telecom capex, and slumping orders from phone and PC manufacturers. Demand for analog chips (-10%) and microprocessors (-9%) was particularly soft.
Analog and security chipmaker O2Micro (OIIM) falls 11.6% AH after warning it expects Q2 revenue of $27.9M-$28.5M, below a prior guidance range of $30.3M-$31.8M and a consensus of $31M. In a troubling sign for the chip industry, which has seen evidence of a stalled recovery mount, O2Micro attributes the warning to "broad-based weakness in demand."
Among the major ETFs seeing redemptions last week were the Industrial SPDR (XLI), losing 9% of its AUM, the Retail Spider (XRT) losing 6%, and the Vanguard Telecommunication Services (VOX), losing 12%. Among the top ETF creations were Semiconductors (SMH), gaining 31% in AUM, and the Euro (FXE), +21%.
One more datapoint suggesting chip demand is improving: Digitimes reports Taiwanese chip developers have "landed an influx of short lead-time orders" from customers looking to boost their inventories from depressed levels. In a positive for the likes of INTC, AMD, and NVDA, it's added notebook chip suppliers have received customer requests for their inventory levels to be raised to a normal 4-6 weeks. (earlier)
DRAM prices firmed over much of December and January after a massive 2011 crash, and Paulo Santos thinks it wasn't a coincidence that chip stocks in general shot higher last month - DRAM maker Micron (MU) certainly wasn't left out. But the DRAM rally is showing signs of stalling, in tandem with signs of global economic weakness, and he thinks that's a good reason to take profits on chip stocks.