Supply issues and weakening demand for computers appear to be mucking up the outlook for chipmakers for the rest of the year.
Wall Street analysts recently have been on road trips to Asia, where they’ve tried to suss out the demand picture ahead of the back-to-school season—a popular time for electronics shopping that’s seen as a bellwether for the industry.
What they’ve found doesn’t bode well for makers of chips that go into laptops, smartphones and other consumer electronics.
“There is clearly more caution and concern than prior years,” said Adam Benjamin, an analyst at Jefferies & Co. in New York. “The next two to three weeks are crucial in determining the success or failure of back-to-school sales.”
Back-to-school sales stand to determine how much inventory chipmakers will stock up on before the holidays, he said.
The biggest point of concern, according to analysts, is weaker-than-expected demand for computers.
Some 40% of all of the chips end up in PCs.
PC orders are “falling off a cliff,” said J.P. Morgan Chase & Co. analyst Christopher Danely.
“Our checks in the Taiwan PC food chain indicate order rates from the PC end market deteriorated sharply during the last part of July,” Danely said in a research note. “We believe order rates declined even more toward the end of the month.”
Chip Outlook
The outlook doesn’t look promising for other companies that make chips for a variety of consumer devices, including Irvine’s Broad-com Inc., the county’s largest chipmaker.
“We expect the (demand) weakness to show up in every end market for semiconductors, just as it always has during downturns,” Danely said.
Two industry heavyweights, Intel Corp. and Advanced Micro Devices Inc., recently lowered their outlooks for the current quarter, which tipped off investors to more pervasive demand issues.
Wedbush Securities Inc. analyst Patrick Wang said he’s “incrementally more negative on the PC supply chain,” owing to “questionable demand.”
“Demand doesn’t appear to have improved in the U.S., Europe or China,” Wang said. “Visibility is now hazier than before.”
Growing stockpiles and longer lead times for ordering also are red flags for analysts and investors.
Supplies at factories, distributors and chipmakers themselves grew more than 10% from the first to the second quarter of this year, according to Craig Berger, an analyst at FBR Capital Markets Corp. in New York.
The gain was “about five points worse than we expected, raising heightened red flags about future revenue and earnings misses by chip firms,” Berger said in a research note.
Even as analysts and executives worry about weakening demand and a build- up of chip supplies, another concern— ironically—are tight supplies of chips and other electronics.
Factories across Asia have seen production strained after cutting staff and putting off equipment purchases during the downturn.
The situation has been compounded by aggressive ordering by some big customers, which now is leading to concerns about oversupply in the second half as demand tempers.
Broadcom, which makes chips for computers, cell phones, Blu-ray players, Bluetooth devices and other consumer electronics, has felt the supply pinch.
“We see a very tight situation and we’re going to need to continue to work on that,” Broadcom Chief Executive Scott McGregor said on a call with analysts last month. “That being said, I think Broadcom has both done a good job working with multiple suppliers and creating a diversified supply base for our parts.”
All of these factors are adding up to a second half of 2010 that will be “well below normal” for chipmakers, according to Daniel Berenbaum, an analyst at Auriga USA LLC in New York.
“When the correction comes, we think it’s more likely to be sharp and painful than shallow and benign,” Berenbaum said. “More players in the manufacturing food chain are coming to the conclusion that the second half (of the year) will be well below normal.”
Others on Wall Street are a bit skeptical that the inventory issues will cause problems.
“Inventory has indeed risen across the supply chain, but remains lean by any historical basis,” said Ross Seymore, an analyst at Deutsche Bank Securities Inc. in San Francisco. “The greatest risk to semicon- ductor fundamentals remains demand, not supply.”
Seymore said he looks at the big picture.
“While this is the third consecutive quarter of inventory rising on both an absolute and days basis, we believe inventory levels are simply in the process of returning to ‘normal’ levels,” he said. “Put another way, inventory remains at 2006 levels despite semiconductor revenue being roughly 20% higher today.”
Still, investor concerns rule the day.
The Philadelphia Semiconductor Index, which tracks some 18 chips stocks, including Broadcom, took a nosedive at the end of the first quarter.
The index is off 16% since its most recent peak in late April, but roughly flat during the past 12 months.
