In preparation for an upcoming podcast, we went through a few dozen earnings reports. We should have listened to all the calls, but as they say “we gave at the office” having done more than enough of that in a past life. We were still able to pick up a few interesting themes that seem to be percolating across semis right now.
The foundries look good for now. TSMC kicked off earnings season and reported numbers good enough to prevent the panic that seemed to possess many investors leading into their report. For the most part, the wafer fabrication equipment (WFE) companies all seemed to be holding steady as well, with the exception of companies like LAM whose heavy China exposure now shut off. Fab utilization is still high and WFE backlog is still solid. These companies are so upstream that they are usually the last to see a downturn, but for the moment there are no obvious concerns.
For the fabless companies, their outlook depended heavily on what markets they sell into. Anything consumer related remains weak, the hangover from the 2021/22 demand pull-forward is still taking its toll. This was most apparent with the smartphone companies – Qualcomm, Skyworks and Qorvo all disappointed somehow. Even here, there is a clear split between companies with some Apple exposure (Qualcomm) and those with only Android exposure (Mediatek). The good news is that most of these companies see the sector bottoming this quarter, and point to a recovery in the second half, more on the 2H below.
By contrast, most of the industrial names largely did well. These companies are the last to recover from the capacity shortages, so maybe these results are enjoying the last days of the cyclical summer, or maybe demand is just holding steady. Probably some combination of both. There is always a lot going on within these companies and from the outside it is hard to really gauge what end markets are doing well and which are struggling. Companies do provide some color on this, its just that everyone’s details differ. Texas Instruments, which deserves an award for being the most boring company in the space (in a good way) sounded the most sanguine, and their stock fell afterwards. By contrast some of the other companies actually talked about price increases. This is a trend we are watching closely because our sense is that once we sift through the cross-currents of cyclicality there is considerable room for broader price increases across the sector. Maybe.
Overall, the sector seems to be weathering the downturn fairly well. If the major economies really take a turn for the worse than all bets are off, but as this looks decreasingly likely, there is room for some optimism in semis this year. That being said, almost every company expressed some degree of optimism that the second of 2023 would show improvement. Everyone is putting a lot of faith in that, and normally that would be a cause for some concern. But there are no obvious industry-specific factors to cast doubt on that faith. Absent macro-economic shocks or some more really bad geopolitical news the third and fourth quarters of this year could be back to good times.