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Volatility And A Murky Near-Term Outlook Hammer Renesas Electronics

Stephen Simpson profile picture
Stephen Simpson


  • Renesas beat second quarter expectations, but results were not particularly strong and the beat was driven by delayed inventory corrections.
  • Management now expects bigger inventory corrections in the auto business in Q3, while the outlook for the industrial business is deteriorating quickly on weakening Chinese automation orders.
  • Renesas shares appear to have attractive long-term potential, but the short-term outlook is still quite rocky and uncertain.

I had previously said that I thought this year could be a little shaky for Japan’s Renesas Electronics (OTCPK:RNECY) (6723.T), the global leader in microcontrollers (or MCUs) and one of the leaders in semiconductors for autos, but I didn’t expect the sharp declines in the stock since July, nor the significant underperformance to peers like ON Semiconductor (ON), Infineon (OTCQX:IFNNY), or STMicroelectronics (STM) in what has admittedly been a weakening market for many chip companies.

Between inventory corrections in the auto channel, a much weaker outlook for industrial automation in China, and less near-term leverage to strong auto segments, the next few quarters could still be rough for Renesas. The long-term outlook remains favorable for the company, though, and the market seems to be pricing in an ugly correction. It may take a little while for this stock to shake off these worries, but the potential value makes this a name worth watching.

Readers should note that Renesas’s ADRs are not particularly liquid.

A Better Second Quarter, But Not Necessary For The Right Reasons

Renesas did beat expectations by a significant margin in the second quarter, but the reasons for that outperformance don’t really build any particular confidence in the near-term outlook. Likewise, with weaker guidance for the third quarter and weaker implied guidance beyond that, the second quarter’s better-than-expected numbers are little more than just kicking the can down the road a bit.

Revenue rose 3% in the second quarter, with semiconductor revenue up 3% year-over-year and 9% quarter-over-quarter. That was around 4% better than expected, with all segments showing growth in the quarter. Auto sales were up 2% (and up 15% qoq), while Industrial was up 6% (up 1% qoq), and “Broadbased” was up 2% (up 7% qoq).

Gross margin declined slightly from the year-ago level on a

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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