A Turning Point Near for Semiconductors?
Our regular readers know we follow the orders for semiconductor equipment as a leading indicator of semiconductor supply, on the reasoning that more equipment to make semiconductors will lead to more semiconductors being made. We also believe that when supply is growing faster than demand it will be bad for prices and lead to circumstances like Maxim’s disappointing earnings announcement yesterday.
Last night the semiconductor equipment trade organization SEMI released their latest equipment book/bill figures (for August.) Bookings were up nearly 70% year/year, while billings (installed equipment) rose 65%. Both growth rates are far higher than the 11.5% year/year growth in semiconductor demand in July (August figures for semis are not yet released.)
It is beginning to look like a turning point is near (bulls would argue we missed it last month). The enormous quantities of manufacturing equipment ordered over the last several months are now being installed, and will soon affect inventory levels. Meanwhile, the rate of growth for new orders is slowing down (and we believe some of the existing orders will be pushed back or cancelled altogether.) So the seeds to solve the problem are also being planted.
We think a slowdown in consumer spending will affect the holiday spending on consumer electronics more than the market currently expects, and that this will cause a final (for this cycle) plunge in semiconductor prices in the relatively near future. After that, it looks like the clouds may finally pass.
Disclosure: William Trent has a long position in SMH.
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A useful chart would be to overlay the SMH over the chart you have in your writeup - i.e. how quickly did the stocks react to this data? Is it possible to publish that chart and/or is it possible to get at the data used to get the supply/demand chart.
We have found predictive value in the analysis, but the overlay is very sensitive to scaling and other factors. It is easy to make it appear as though there is a stronger or weaker connection than there actually is.
It also seems as though the market is increasingly efficient, in the sense that the reaction to this occurs earlier and earlier in the cycle. As we say in the post, it would be fair for bulls to argue that the turn was anticipated in the recent rally.
[…] The problem is, no one seems to have told the semiconductor manufacturers that growth has slowed down. In August they placed orders for nearly 70% more semiconductor manufacturing equipment than they ordered one year ago. By comparing the growth rates from the SIA reported chip sales to the equipment order data from Semiconductor Equipment and Materials International (SEMI) yields the following chart: […]