A Deep Dive Into The Semiconductor Sector
Gary Tanashian | Aug 30, 2016 12:48AM ET
We have been using the Semis as a one of several economic signposts, and as an investment/trading destination since the Semi Equipment ‘bookings’ category in the Book-to-Bill ratio began to ramp up several months ago. But those who say that Semiconductors are subject to pricing pressures are correct. It is a segment in which people need to be discrete with their investments. NFTRH 410 updated some details about this market leader.
h3 Semiconductor Sector/h3
Semi has been a leader for our overall market and economic view, which has been bullish since noting that a trend of three straight months of increased bookings was established in April. The Book-to-Bill for July came in strong once again, with a new high in the key ‘bookings’ category.
From SEMI: “Monthly bookings have exceeded $1.7 billion for the past three months with monthly billings trending in a similar manner,” said Denny McGuirk, president and CEO of SEMI. “Recent earnings announcements have indicated that strong purchasing activity by China and 3D NAND producers will continue in the near-term.”
China? That does not sound like a long-term, stable fundamental underpinning. This Semi ramp up may be relatively selective (aside from Chinese demand, which could cut out at any time, it would pay to focus on 3D NAND).
From Market Realist: “Applied Materials’ (AMAT) strong guidance for fiscal 4Q16 reflects the overall semiconductor industry’s health. AMAT revised its forecast for 2016 WFE (wafer fab equipment) spending from flat to single-digit growth. The slight growth would be driven by a 40% YoY (year-over-year) increase in 3D NAND spending and a 5%–10% YoY increase in foundry spending. However, this growth would be partially offset by a 25% YoY decline in DRAM (dynamic random access memory) spending and a slight decline in logic spending. In 2016, AMAT is witnessing a broader mix of foundry customers from different geographies, especially China.”
Get The News You Want
Also from SEMI, in a mid-year update: “While many are forecasting low-single digit unit growth for semiconductor devices, average selling price (ASP) trends will drag down the overall revenue outlook for the industry.”
This is important because I agree that the Semiconductor manufacturers are a crap shoot, as many of their products are in essence, commodities, in that they are in a highly competitive industry and readily available. The Equipment and Materials sectors service the whole of the sphere with specialized equipment and materials.
“One bright spot are semiconductor equipment bookings that are showing a 6 percent year-over-year increase (see figure below). The strength in bookings is boding well for a stronger second half of the year and is supported by 2016 capex plans by Intel (NASDAQ:INTC), Samsung (KS:005930) and TSMC as detailed by IC Insights’ recently released bulletin.
Other segments are showing positive momentum. First quarter silicon volume shipments, as well as equipment bookings and billings were higher than the fourth quarter of last year. Quarterly increases continued into the second quarter for equipment bookings and billings, silicon wafer volumes, and leadframes. The World Semiconductor Trade Statistics showed that device shipments increased 5 percent, resulting in a 1 percent increase in chip revenues in the second quarter when compared to the first quarter. Based on past data trends gains are expected to continue into the third quarter as the third quarter, on average, is the strongest quarter for semiconductors.
The lingering question is, “will the gains in the second quarter and anticipated gains in the third be enough to offset the typically slow fourth quarter?” The answer is, “it depends.” From a device perspective it does not appear it will, as evidenced by the current mid-year outlooks depicted above [graph omitted]. However, from an equipment and materials point of view the future is more promising. SEMI is expecting the semiconductor equipment market to increase a nominal 1 percent this year, while the materials market will increase just under 2 percent, which would put the equipment and materials markets at $36.9 billion and $44.1 billion, respectively.”
How does this affect our view? As a leading economic indicator I’d say that the Equipment and Materials ramp up remains a positive, although we should tamp down any enthusiasm that a grand new economic era may be upon us and continue to cross reference other indicators like PALL-Gold, Commodities vs. Gold, etc. for cyclical indications. As a view on direct investment or trading in the Semi sector, I’d say we’d need to be very discrete. Quality, leading equipment companies like Applied Materials (NASDAQ:AMAT) and Lam Research (NASDAQ:LRCX) and Materials companies like Cabot Microelectronics (NASDAQ:CCMP) are the focus.
This chart shows the bullish state of 2 Equipment companies, the constructive state of another, and one still bullish Materials company. We’ll look at others going forward if/as the situation remains constructive.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.