A Core i9 chip from Intel. The company continues to struggle with falling demand for PCs.
Courtesy of Intel
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Chip Gloom. Hi everyone. Earnings season is in full swing. There’s no better way to get insights on what’s happening in the technology business and the economy than hearing directly from the companies themselves.
Heading into earnings, investors were hoping that executives would signal a coming end to the semiconductor downturn. But comments over the past week from the three major chip makers —
Texas Instruments
(ticker:
TXN
),
Intel
(
INTC
), and
AMD
)—have offered a different reality: the chip business continues to falter.
Here are my four key takeaways from chip earnings thus far:
1. The slowing global economy is hurting chip demand in nearly every industry except for one.
Texas Instruments is regarded as a bellwether for the economy because of the broad-based nature of its 100,000-plus customers. On top of a disappointing revenue forecast for the current quarter, the company saw weak demand in all its end markets, except for the auto industry.
Tellingly, Texas Instruments deflected a question from a Wall Street analyst who asked if the bottom for the industry was imminent. Instead, management said it “can’t predict” when demand would rebound, adding that customer inventory reduction cycles usually take several quarters to be completed.
2. Computer chip demand is fading. There is little visibility.
The PC processor business keeps getting worse. It turns out that consumers who bought laptops during the pandemic don’t need to replace their computers every year.
Last Thursday, Intel missed earnings expectations for the fourth quarter and provided a revenue forecast for its March quarter that was far below Wall Street’s consensus—down 40% year-over-year at the midpoint of its guidance range.
Intel’s “Q1 outlook was astonishingly bad even vs. low expectations, with revenues and gross margins collapsing amid a further weakening environment and an absolutely massive inventory flush,” Bernstein analyst Stacy Rasgon wrote the day after Intel’s report. “The magnitude of the deterioration is stunning.”
Both Intel and AMD declined to give their typical annual guidance, citing economic uncertainty. That’s indicative of their lack of confidence about current business conditions.
3. AMD has a life raft in server chips.
While AMD’s general PC chip business is as bad as Intel’s, the company has an important bright spot in its data center unit. AMD is proving better-performing, products can mitigate negative macro impacts, since it’s taking business from Intel, its chief rival.
Analyst comparisons show a large price-to-performance gap between AMD’s Genoa server chip and Intel’s Sapphire Rapids server processor, allowing AMD to gain market share with cloud computing vendors and corporations.
The competitive disparity showed up in the December quarter numbers as Intel’s data center segment revenue fell 33% year-over-year, while AMD’s data center unit revenue was up by 42%.
The difference in product capability means AMD will likely continue to gain share in the server segment for several quarters to come.
4. No recovery in China yet
Investors have been looking for a turnaround in China to boost semiconductor earnings. So far, it hasn’t happened.
In a phone interview with Barron’s, Intel CFO David Zinsner said China was its weakest region relative to initial expectations for the fourth quarter. AMD CEO Lisa Su similarly said on the company’s call with investors that, while a recovery in China would benefit business, the timing of a rebound was “very difficult to call.”
Some analysts currently recommend buying stocks simply because chip downturns eventually end, even if they’re not seeing actual evidence of a turnaround. Following that strategy risks being early and suffering significant declines on false starts.
Fortunately, there is a way for investors to figure out when the upturn actually happens: Chip pricing is the telltale sign of demand. When demand falters, prices are reduced to move inventory. When demand improves, prices will rise as promotions are no longer needed. For now, PC processors, memory, and storage are all still getting heavily discounted at retailers.
On the AMD earnings call, Chief Financial Officer Jean Hu vowed that the company wouldn’t increase expenses until it saw the demand environment get better.
Investors should show similar patience.
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Write to Tae Kim at tae.kim@barrons.com or follow him on Twitter at @firstadopter
