Silicon chips are a good guide to global economic health owing to their ubiquity – they are everywhere, from smartphones to laptops, cars to industrial robots, and servers to smart meters.
And global sales of silicon chips are expected to top $600 billion in 2023 to set a second consecutive all-time high, analysts at AJ Bell highlighted in a client note.
However, disappointing earnings, cuts to capital investment budgets, ballooning inventories and fears of a recession have all weighed heavily on the sector, the analysts said.
They pointed out that an upturn in trading and the SOX Index would potentially be a good sign for both the global economy and also global equities as the benchmark has an uncanny record of being a decent guide to investors’ risk appetite.
The PHLX Semiconductor Sector (SOX) is a Philadelphia Stock Exchange capitalization-weighted index composed of the 30 largest US companies primarily involved in the design, distribution, manufacture, and sale of semiconductors.
SOX constituent Micron Technology, Inc. (NASDAQ:MU) is set to report its second quarter earnings on Tuesday. After a "shocker" of a first quarter which saw it post a 47% decline in sales to $4.1 billion and a $195 million net loss, down from a profit of $2.3 billion a year earlier, another loss is expected.
The Idaho-headquartered firm is a specialist in memory chips, DRAM, NOR and NAND, which are used in computing and smart mobile devices to store data and its shares are way down from their highs too, the AJ Bell analysts noted.
The company’s president and CEO Sanjay Mehrotra flagged weakness in end markets as the key problem as customers started to wind down inventory of unsold product and also possibly components, too, all over- and double-ordered during the lockdown technology boom of 2020-2021, the analysts said.
Micron’s forecast for 2Q 2023 is for a further quarterly dip in sales to $3.8 billion and a loss per share of $0.62, against a loss of $0.18 in 1Q and a profit of $2 a year ago.
The company also forecast a cut in the full-year capital investment budget to $7.25 billion from the prior budget of $8 billion and the $12.1 billion spent in the year to August 2022.
“These huge swings in profit show how highly operationally geared the business is, as even minor changes in sales make a significant difference when you have $38 billion of property, plant and equipment on the balance sheet – chip fabrication facilities are big and expensive and need to run flat-out if they are to make money,” the AJ Bell analysts wrote.
“Analysts and shareholders looking for good news will note that current consensus forecasts assume that the quarter just ended will see the bottom for sales and that Q3 will see an uptick,” they said.
“However, the need to work down inventory means that quarterly net losses are expected to run at around $1 billion all the way through Q2, Q3 and Q4 – ultimately an epic bust to follow the epic, stimulus-fuelled boom of 2020-2021.”
Contact the author at stephen.gunnion@proactiveinvestors.com