Cautious Optimism About Semiconductors

Includes: PSI, SMH, XSD
by: Wall Street Strategies

By Carlos Guillen

In light of the continuing flow of poor macro-economic data, it is becoming apparent that the semiconductor environment is looking less and less favorable for the remaining second half of the year. Increasing worries about other European Union members needing bailouts and worsening unemployment situation in the U.S. will likely slow overall electronics consumption. Signs of this may already be evident in the latest data from the Semiconductor Industry Association (SIA), as it demonstrated less than seasonal growth in June. As a result, I am turning less optimistic about semiconductor revenue growth and I am reducing my full year growth rate projection.

According to SIA's latest data, semiconductor revenue in June grew month-over-month at a less than seasonal rate for the second consecutive month. In fact, global semiconductor revenue during June increased by 15.4 percent, which was lower than the seasonal rate of 20.2 percent achieved over the last 10 year. In May, m-o-m growth was just 0.35%, less than the seasonal growth rate of 4.7%. The combination of these slower than seasonal m-o-m growth rates caused second quarter revenue to decline by 2.0 percent from the level achieved during the first quarter, representing a contraction that was surprising given that second quarter seasonal growth rate is approximately 2.5 percent quarter-over-quarter. From a less noisy perspective, the three-month moving average (3MMA) global semiconductor revenue in June decreased by approximately 1.5 percent to $24.7 billion from the $25.0 billion achieved in May. Even from this smooth-out view, growth was still below the corresponding seasonal growth rate of 0.5 percent.

While I still expect to see semiconductor revenue growth fueled by increasing demand in all end markets, I believe that a retracting consumer will attenuate growth during the second half of this year. PC unit growth should continue, although at a slower rate than I previously anticipated. Corporations have been investing in new PC and IT equipment, and this is still in progress. Emerging markets demand for PCs is also strong, but again a weaker consumer in mature markets will bring growth rates lower for the rest of the year. The explosion in demand for high-end smart-phones and tablets around the world will be another force providing support for semiconductor revenue growth. Additionally, automotive and industrial electronics demand will also provide growth as more green and smart technologies are designed into vehicles and monitoring equipment, and as the content of audio and video electronics in the car increases.

All in all, I remain cautiously optimistic about the semiconductor business for the rest of this year. I continue to see growth drivers that support healthy growth this year, but at the same time I see risks coming from increasing macroeconomic uncertainties around the world. As such, I am reducing my semiconductor revenue growth projection for the rest of the year to 6.6 percent down from 10 percent, with September quarter Q-o-Q growth of 9 percent, stronger than seasonal growth of about 7.6 percent.