Semiconductors – Exception or canary?

Texas Instruments raises questions on the supercycle.

• Texas Instruments bucked the semiconductor super cycle narrative in its Q2 2021 results with a forecast that has led some to question whether the semiconductor cycle is already peaking.
• Q2 2021 revenue / EPS were $4.58bn / $1.99 compared to estimates of $4.36bn / $1.83 but it was in the guidance where concerns were raised.
• Here, Texas Instruments forecasts Q3 2021 revenues / EPS of $4.4bn – $4.8bn / $1.87 – $2.13 compared to forecasts of $4.6bn / $1.97.
• The concern obviously is that with estimates not being beaten, that demand is beginning to peak and that we may have reached the top of the cycle already.
• This is a big contrast to what everyone else is saying where strong demand and short supply mean that revenue growth is expected to continue at least into 2022 when new capacity should start coming on stream.
• Texas Instruments has thousands of different products that it sells to over 100,000 customers which is why it is a very good bellwether for the general health of the industry.
• The Q3 2021 forecast still represents strong growth at 21% YoY but crucially in the mind of the short-term obsessed market, this is below the 35% YoY seen in Q2 2021 and 41% YoY seen in Q1 2021.
• Internal inventories at Texas Instruments are well below normal levels and lead times are still lengthening across a number of its different products in a sign that the cycle is not peaking.
• Unfortunately, management would not be drawn on the causes for the slowdown in growth which meant that the market was left to make up its own mind.
• I suspect that the real reason that the company would not be drawn is that it has no idea why the growth slowdown has occurred and so could not come up with a good answer.
• I suspect that it is due to a number of different factors which when added up have resulted in the observed slowdown.
• These look like to have been the fact that growth has been extremely high recently making future rapid growth very difficult, downstream shortages of raw materials, and capacity constraints at Texas Instruments itself.
• Consequently, I don’t think that this is the signal that indicates that the top of the current supercycle is here.
• Almost everybody else is saying that demand and supply tightness is going to last into early 2022 at least and so for the moment I am happy to go with the majority.
• I think that the top of the cycle will be signaled by one or two key factors.
• These are the start-up of significant new capacity and/or the cessation of the current fear-driven inventory stocking that is going on to ensure that companies can meet demand.
• Rising inflation (which looks permanent and not transitory) may also take a bite out of demand but this factor has yet to have an impact on demand as many suppliers are absorbing the cost increases and not passing them on.
• When this changes, then inflation, as measured by the CPI, is likely to rise again and then demand will take a hit.
• The factors for a very strong downswing in semiconductors are lining up but I think that they are still quite far from causing the cycle to peak.
• Hence, I am sticking with the view that the cycle will peak sometime in the first half of 2022.
• This one is the exception, not the canary.