Semi Equipment Orders Rise - Terrible News for Semis
The Philadelphia Semiconducor Index (SOX) peaked in January 2006 and has since fallen about 16% (though it is up from the summer lows).
Not coincidentally, we would argue, January 2006 marked the point at which orders for semiconductor equipment (an indicator of future supply) began to outpace end demand for semiconductors and the summer low coincided with a turn toward capital discipline (though supply was still growing faster than demand the rate at which it was doing so started to slow down.)
Unfortunately, just when it looked as if things might be set to turn the semiconductor companies re-accelerated their pace of equipment orders over the last two months.
Until orders for semiconductor equipment start growing at less than the roughly 10% growth in demand for semis, there will continue to be the brutal pricing environment we have seen recently. The decent guidance and calling of bottoms are pipe dreams.
Can we lay it out any more simply?
Disclosure: William Trent has a long position in SMH.
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[…] The thing is, the overcapacity is just starting. Orders for new equipment began growing at a faster rate than end demand more than a year ago, and the trend has not reversed. Much of that equipment still has not been installed, and the latest figures suggest things will get even worse. […]
[…] It doesn’t sound so bad until you recall that orders for new semiconductor equipment rose four times as quickly. That is going to make the inventory situation, which is already bad, worse. […]
[…] The good thing about the downward revision, and also the decline in February, is that it restores some balance to at least the trend in equipment orders relative to end demand for semiconductors. Although supply (chip equipment orders) is still growing much faster than the roughly 10% growth in semiconductor demand, at least the rate at which the capacity is growing is starting to slow down again. Furthermore, the billings (which represent what is actually installed rather than orders, which may prove too optimistic) have been running at a slower rate than orders. The 22% growth of installed equipment is still well higher than what is needed, but has less far to fall. […]