Semiconductors Q2 2023 – Supercycle pt. XIII

AI cannot offset the general malaise.

• The contrast between TSMC and the rest of the semiconductor industry is a result of AI not being big enough to offset weakness elsewhere and the fact that inventory reductions are still going on at the semiconductor companies themselves despite having ceased elsewhere.
• The Q2 2023 reporting season is now well underway and while the consumer is faring better than expected (more tomorrow), components and semiconductors remain a mixed bag.
• So far this season, Samsung, Micron and Intel have all laid claim to slightly better-than-expected guidance as a result of stabilisation in their customers’ inventories but they are continuing to wind down their own to conserve cash and cut costs.
• This is the reason for the discrepancy between an ending of revenue and earnings cuts at semiconductor companies while TSMC has cut its full-year 2023 guidance once again.
• TSMC now expects full-year 2023 revenues to decline by around 10% in USD terms compared to previous guidance of a single-digit decline.
• This is the net result of ongoing inventory corrections at its customers which are still reducing the number of wafers that they carry.
• Despite all the excitement and hype about TSMC being the enabler of the AI revolution, AI makes up just 6% of its total revenues almost all of which is coming from Nvidia.
• With 70% gross margins, it is perfectly obvious where the value in the AI story is accruing meaning that TSMC is not really an AI company at all.
• This segment is growing at 50% YoY but it remains so small that it is unable to offset the weakness in other areas.
• Crucially, TSMC has not changed its expectations for end demand as far as consumers are concerned, meaning that the theme of hitting the bottom remains pretty much intact.
• Hence, for the rest of the season, I expect that the component companies will echo the commentary of Samsung, Intel and Micron while the foundries look like they are in for another tricky quarter or two.
• We are also seeing a general push out of new fab construction as economic reality is beginning to impact the geopolitical desire to diversify leading-edge semiconductors away from China’s backyard.
• TSMC and Intel are citing other reasons for the delays in order to keep the providers of the subsidies happy, but I suspect that it is mostly due to uncertainty around end demand that will be required to absorb all of this new capacity.
• Consequently, the outlook for the semiconductors going into H2 2023 is stable with demand no longer falling but also not seeing any real sign of recovery.
• Which way this goes is going to depend on what happens to inflation which is showing signs of moving back towards baseline in the US although it remains stubbornly high in Europe.
• This is largely a result of the Euro not being the world’s reserve currency, which has allowed the US to export much of its inflation to other countries over the last few years.
• I suspect that the US inflation will continue to trend back towards 2% but it is going to take some time to get there, and I am looking for this to be hit somewhere in H1 2024.
• Hence, I think that the current stagnant environment will continue for a while yet.
• In semiconductors, the best way to play this is going to be in fabless semiconductors where both Qualcomm and MediaTek have good long-term growth profiles but remain very reasonably valued.