(Bloomberg) — Signs are mounting that the tech slump may be deeper and more lasting than feared.
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After years of record capital spending, chipmakers are warning weekly that demand is fizzling. In the latest sign of trouble, Samsung Electronics Co. and Advanced Micro Devices Inc. they reported disappointing results within hours of each other, which widely missed projections.
Samsung, the world’s biggest memory chipmaker, reported a 32% drop in operating income, while PC processor chipmaker AMD said it will miss its previous forecast by about 1 billion of dollars Analyst reactions ranged from “awesome” to “Uff-da!”
These figures followed unpleasant comments from memory maker Micron Technologies Inc. and Kioxia Holdings Corp., which are cutting spending and production to try to stabilize falling prices. AMD shares fell, leading losses in chip and PC makers from Taiwan Semiconductor Manufacturing Co. to Lenovo Group Ltd. Friday.
“Final demand appears to have deteriorated markedly in recent weeks and end customers appear to be aggressively draining inventory,” Bernstein’s Stacy Rasgon said. AMD’s cut in customer revenue “is certainly a bit impressive.”
Read: ‘Hard times’ as major memory makers cut production to oversupply
Weaker-than-expected demand for consumer electronics is weighing on businesses along with rising shipping and materials costs. Cost-cutting has become the new norm across the tech industry, and companies that hoarded chips during the pandemic are now opting to cancel or postpone orders and tap into inventory.
The semiconductor industry is also grappling with export restrictions from the US government, which is increasing pressure on its allies to prevent shipments of cutting-edge chips to a growing list of Chinese companies as it seeks to contain the Asian country. That makes business difficult for chipmakers from AMD to Nvidia Corp. in the world’s largest semiconductor market.
“This bear cycle is not only driven by typical supply and demand dynamics. It is different from past cycles because of geopolitical risks,” said Heo Pil-Seok, CEO of Midas International Asset Management in Seoul. “The US government’s export controls would further limit the sales of IT companies in China, and a large part of the chip demand will be weakened. If AMD, Nvidia cannot sell their chips in China, memory makers’ earnings will deteriorate further.”
The companies themselves are preparing for a prolonged downturn. The head of Samsung’s chip business, Kyung Kyehyun, said he does not see the memory market recovering over the next year. Kyung told employees at an internal event that Samsung cut its guidance for chip sales in the second half of this year by 32% compared to a forecast in April, according to the Korea Economic Daily.
What Bloomberg Intelligence says
PC demand will remain soft in Q4, given the large inventory of PC processors as announced by chipmaker AMD. The depreciation earned may not be sufficient to offset weak sales of memory chips and consumer electronics such as televisions.
— Masahiro Wakasugi, BI Analyst
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“No party lasts forever,” said Rasgon. “It is a cyclical industry. There were some years of very, very strong growth” that prompted companies to increase their capacity. “You believe the supply for the demand that turns out not to be as real as you thought it was.”
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