Chip Analysts Say July Sales Data Show the Downturn Isn’t Over

(Bloomberg) -- Semiconductor companies continue to struggle with weak demand and high inventory levels, analysts wrote, citing the latest month of industry sales data.

Total semiconductor sales fell about 15% on a year-over-year basis in July, according to the brokerages, which cited data from the Semiconductor Industry Association. That followed a drop of 17% in June, and May’s 15% decline.

The report shows that “we remain deep in a semiconductor downturn,” wrote David Wong, an analyst at Nomura Instinet. The report “is in line with the muted forward guidance given over the last six weeks by several chip companies that we consider to be broad indicators for many chip end markets.”

Both Citi and Morgan Stanley wrote that the data were below their own forecasts for the month. Citi trimmed its full-year estimate for total semiconductor sales, to $409.9 billion from $410.7 billion.

Morgan Stanley blamed the weak July on a “sharp reversal” in memory-chip sales, which “more than offset strength in logic” chips.

“Broader semis remain weak, given end-demand challenges nearly everywhere,” analyst Joseph Moore wrote to clients.

Longbow Research wrote that it saw “no 2H demand rebound” for semiconductor companies, referring to the second half of the year. Analyst Shawn Harrison added that consensus forecasts for the fourth quarter looked “overly bullish.”

The Philadelphia Semiconductor Index fell as much as 2.2% on Tuesday. In addition to the SIA data, which was released over the holiday weekend, the industry was pressured by the latest escalation of trade tensions between the U.S. and China, as more tariffs were levied on both nation’s goods effective Sept. 1. The industry benchmark is down nearly 9% from a recent peak in late July.

Chipmakers have had a high correlation to the trade issue, as not only do many companies in the industry derive much of their revenue from China, but the country is a key part of their supply chains as well.

Among specific stocks, Texas Instruments Inc., Nvidia Corp. and Advanced Micro Devices fell as much as 2.5% on Tuesday. Broadcom Inc. shed 3.7% intraday.

Following the months of weak sales data, RBC Capital Markets suggested that the industry could be nearing a bottom. “Given the severity of the decreases, we think downside from here is limited,” analyst Mitch Steves wrote, referring specifically to declines in memory chips.

Also on Tuesday, Evercore ISI upgraded a trio of chipmakers; the firm sees “continued positive earnings revisions leading shares higher into year-end and beyond.” Both KLA Corp. and Lam Research Corp. were lifted to outperform from in-line while memory-chip maker Western Digital was upgraded to in-line from underperform.

To contact the reporter on this story: Ryan Vlastelica in New York at rvlastelica1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Scott Schnipper

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