The semiconductor industry is experiencing a really bad hangover
The demand for memory chips is seen as a benchmark for the health of the semiconductor industry. Why?
- They’re found in most electronic devices.
- They make up ~27% of the total semiconductor market.
Diagnosing the industry’s health, we’d say it has a raging case of a Bull Market Hangover. The key symptoms are over-supply, collapsing demand and stock prices that went too far, too fast. It’s also commonly found in cyclical industries.
Another cycle, another downturn
Remember: The semiconductor industry is cyclical and tends to rise and fall alongside the economic cycle.
The industry began crumbling at the start of this year as PC, phone and gaming demand fell.
Now, the proverbial sh*t has hit the fan for two of the largest memory chip makers, Micron and Samsung.
- Samsung expects its operating earnings to fall 32% in the third quarter.
- Micron’s earnings fell 45% and issued a grim outlook.
Too much supply is bringing down prices. The average price of two major memory chips, DRAM and NAND flash, fell 15% and 28%, respectively, in the third quarter — from the previous. TrendForce expects prices to stop falling sometime in 2023.
No part of the industry has been spared
Here’s what Avril Wu of TrendForce has to say about memory chip makers (WSJ):
- They tend to get hit earlier from lower demand and see prices fall first.
- Compared to other types of chips, they’re less differentiated with more competition.
The memory chip market is also among the slowest-growing part of the semiconductor industry. Still, the damage has spread to GPU and graphics chipmakers like AMD and Nvidia.
Last week, AMD reduced its sales forecast by another $1.1B (16%) from its already reduced August sales forecast.
Investors: Chipmakers are always behind the curve
It’s a trend we’ve seen happen way too often.
- In a period of economic growth, chipmakers increase production to meet demand. But it takes years for new supply to go online.
- When new production arrives, demand falls, and the market is flooded with supply — dragging chip prices down.
This is the nature of investing in semiconductors. It’s a roller coaster ride that favors those with time and the stomach to handle volatility.
The iShares Semiconductor ETF (NASDAQ:SOXX) is already down 42% from its peak. But even with the decline, holding the ETF over the past 10 years would have nearly tripled the return of the S&P 500.