I’d call them inauspicious developments, but that seems trite. Seemingly all developments are inauspicious in 2022.
Instead, let’s just say markets on Wednesday were presented with more evidence of a pernicious macro trend that’s increasingly intertwined with geopolitical tensions.
Just hours after Texas Instruments guided below the Street for Q4 revenue and earnings, South Korea’s SK Hynix said profits dropped 60% in Q3 to KRW1.66 trillion, nowhere near the 2.5 trillion analysts expected. But that wasn’t even the headline. The story, rather, was the company’s outlook for capex, which will fall “more than 50%” in 2023 (slide below, from the deck).
Hynix said the planned “substantial cuts” are necessary “to balance supply with market demand levels.” In the press release, the company cited “sluggish demand for DRAM and NAND products amid a worsening macroeconomic environment worldwide.”
The balance of the color was dour, although analysts will probably applaud the company’s bravery and discipline — unveiling a 50%+ capex cut isn’t the easiest thing to do. “The semiconductor memory industry is facing an unprecedented deterioration in market conditions as uncertainties in the business environment continued,” Hynix told investors. “The deterioration occurred as the shipments of PCs and smartphone manufacturers, which are major buyers of memory chips, have decreased.”
That assessment was consistent with the notion that the ~$600 billion chip industry is mired in a deep downturn, which is poised to worsen. By most accounts, global demand is decelerating rapidly.
This comes as the escalating economic cold war between the US and China casts a pall over an already fraught situation. Hynix on Wednesday said the Biden administration’s efforts to smother Xi Jinping’s domestic chip ambitions could result in the closure of a plant in Wuxi.
Although Chief Marketing Officer Kevin Noh described a shutdown (or sale) as an “extreme” measure, the fact that he was compelled to mention it at all spoke volumes about the ripple effects of Washington’s crackdown. “If the time comes when [it’s too] difficult to maintain operation of the Wuxi fab, we might have to sell [it] or move the equipment to Korea,” Noh told analysts.
Read more: Chips Ahoy!
On its own analyst call, TI was peppered with questions about a burgeoning slowdown in industrial demand. “[S]o there wasn’t one place that we could put the finger on to say it was one thing or one group of customers, but we did see just different signals… that led us to the conclusion that [the] weakness is broadening [to industrial]” the company’s vice president and head of investor relations, Dave Pahl, told Cowen’s Joshua Buchalter. “And in fact, we expect that weakness to broaden into most of the other markets as well as we move into fourth quarter, with the exception of auto,” Pahl added.
That’s likely to spook markets. Questions around industrial demand were prompted by brief remarks from CEO Rich Templeton, who, in the press release, said that in addition to “expected weakness in personal electronics,” TI experienced “expanding weakness across industrial” in Q3.
All of this probably seems dry to the casual observer, but as longtime readers will readily attest, outside of big banks and mega-cap tech (which I cover as a matter of course), I only highlight company earnings when there’s an obvious macro or geopolitical tie in. Here, there’s both.
Chips are cyclical, but in more normal times you have to be discerning because, as TI CFO Rafael Lizardi noted, “you still have semiconductor cycles” even when the broader economy is stable. Extrapolation from the ebb and flow of semi trends isn’t always straightforward. In 2022, though, the slump is coincident with the broader global slowdown, and, as noted here at the outset, it’s becoming very difficult to discuss it without mentioning the tech standoff between the world’s two largest economies.
Commenting further on Wednesday, Hynix’s Noh tried to put a smile on an otherwise frowny situation. “We will leap forward,” he declared, promising to “overcom[e] this downturn” by leveraging the company’s history as an enterprise “that has always turned crises into opportunities.” Go get ’em, Kevin.
The economy is slowing down. The real question is how deep is the pullback, how fast will it accelerate, and how long will this last?
The one constant amid every market vagary is the desire for prognostications. If only we could go long on Heisenberg?
Last night I saw one of the chip industry insider boards talking about America’s favorite company is giving a huge (ginormous) new chip order to TSMC in Taiwan. When we have to send the US military to Taiwan we can thank Apple and every one of you who buy their products.
Here are the top 10 customers of TMSC, so one can avoid supporting any US companies that purchase from TSMC.
Why limit yourself to not buying apple!!
https://www.statista.com/statistics/1247996/tsmc-revenue-share-of-leading-customers/
Because they really got the whole outsourcing momentum started. AMD eventually followed, as did QCOM, NVDA etc.
Funny how none of them seem to mention the risk that their actions put into place, though I’ll confess that I have not bothered to read through every footnote. Shame on me!
$360 to view that chart. Care to summarize?
I did not realize that was a “one time only” free look-
TMSC largest customers (percentage of TMSC revenues as of 2021)
Aapl 24%
AMD 10%
Qualcom. 8%
Media Tek. 8%
Nvidia. 8%
Broadcom. 7%
Intel. 5%
Will Semi. 2%
NXP. 2%
Marvell. 2%
I signed up and was told I had a “basic” account
Interesting SP500 off only 40bp with tech sucking wind GOOG -8% MSFT -6%. Need semis to finish breaking down and AAPL to join them, then I think SP500 will be buyable, much of the index already is, from a valuation standpoint (only my opinion).
Also interesting to see this from Mike Wilson at MS https://www.bloomberg.com/news/articles/2022-10-26/morgan-stanley-s-wilson-says-bear-market-may-end-in-early-2023
Although there’s some dissonance in what he’s reported as saying (again my opinion only) that’s roughly the same timeframe I have had penciled in. Break the last of the techs down, retest and hopefully break the summer lows, CBs forced to a stop-wait-and-see stance, get through most of the lag from house price/rent to CPI shelter, burn through more of well-off households’ cash and credit, and perhaps this bear market can be done – from levels lower than today, I both think and hope.
H-Man, nice post about another canary. That was a dour report but gets high marks for honesty. If you struggle to pay rent and buy food, new watches, lap tops, phones, cars move to the right side of the menu under special entrees.
I know people living on public assistance, can’t afford insurance or tires for their car or food other than the cheapest junk, who regularly buy new iPhones – not a refurb two generations old, which is what I get, but the latest and greatest.
The last thing many people will give up is their smartphone.
That said, I think even the mighty AAPL is going to cave, before we hit bottom.