Economic Insights Newsletter

Technology Corner: Is the broad-based sell off in the Semiconductor Sector warranted?

Despite these dark clouds over the semiconductor group, earnings season kicked off with several other large players reporting upbeat results.

Texas Instruments delivered first quarter revenue of $4.9 billion, which was up 14% YoY. With the increase driven by growth in industrial, automotive, and enterprise. Industrial and auto market revenue were up 20% and communications was up 10%. Management expects second quarter revenue to be in the $4.2 - 4.8 billion range, which was below consensus estimates. The company took a 10% haircut to revenue guidance due to uncertainty around COVID.

Despite these dark clouds over the semiconductor group, earnings season kicked off with several other large players reporting upbeat results. Major themes include continued strength in server and cloud, recovery in auto and industrial, with handsets holding up well. TSMC (one of the world’s largest chip foundries) is expected to earn roughly $17 billion from Apple orders in calendar 2022. This is up from roughly $13.8 billion in calendar 2021. Apple remains a key customer for TSMC as it pushes further at leading nodes. TSMC now expects revenue to grow about 30% in 2022, signaling resilient demand for electronics despite global macroeconomic uncertainty. Sales growth this year should accelerate from 2021’s 24.9%. That’s in line with executive remarks in April that gave an official outlook of topping mid- to high-20% growth in 2022.

Unlike Texas Instrument’s muted outlook. Broad-based chip manufacturer Analog Devices (ADI), which builds chips for a wide spectrum of sectors including auto, industrial, consumer, data center, and communications, reported stellar 2Q results. ADI saw 2Q revenue of $2.97 billion with double digit year-over-year (YoY) growth across all end markets. Further, double digit sequential growth across all B2B end markets. Management stated that “Despite increasing geopolitical uncertainty and ongoing supply chain disruptions, we enter the second half from a position of strength with increased capacity and continued bookings momentum”.

Top CDMA smart phone chip producer, Qualcomm delivered record revenues of $11.2 billion, representing YoY growth of 41%. The QTC segment that produces chipsets served as the growth engine of the company. IoT revenues grew 61% YoY, with strong growth across all three categories. Consumer, edge, and industrial all grew 50% compared to the year ago quarter. While, the RF front-end revenues grew 28% YoY, and handset revenues grew 56% YoY. The automotive design win pipeline is now over $16 billion, up $3 billion since fiscal Q1. Handset revenues of $6.3 billion increased 56% versus a year-ago quarter. Qualcomm is one on the top producers of modem solutions for Apple.

Apple reported a strong 2Q22 despite COVID-related disruptions and silicon shortages in the legacy nodes, and the lockdowns in China, specifically in Shanghai, hurting supply and demand. Despite these hurdles iPhone revenue grew 5% YoY to a March quarter record despite supply constraints. Growth was driven by a strong response to the iPhone 13 and the SE model. Mac revenue of $10.4 billion was a March quarter record despite supply constraints while 15% YoY growth was driven by strong demand for the M1-powered Pro. Wearables, Home, and Accessories set a March quarter record, up 12% YoY. Total iPhone unit shipments for FY21 was 241 million (vs 190 million in FY20) an annual growth rate of 26% YoY. Apple is now planning on maintaining flat production in 2022 targeting 220 million new iPhones. Unit volume is expected rebound at 250 million units for FY23.

The doom and gloom report posted by Intel was offset by a huge beat from one of its largest competitors, Advanced Micro Devices. Advanced Micro Devices (AMD) reported quarterly earnings of $1.13 per share, which beat the analyst consensus estimate of $0.91 by 24.18%. This is a 117.31% increase over earnings of $0.52 per share from the same period last year. The company reported quarterly sales of $5.89 billion, which beat the analyst consensus estimate of $5.52 billion by 6.65%. This is a 70.89% increase over sales of $3.44 billion the same period last year. AMD’s EPYC chip design appears to gaining marketshare from Intel in data center server markets.

Top memory and smartphone maker Samsung communicated that it expects strong server demand in memory through 2022. Memory saw better than expected results due to lower than expected ASP declines in Q1. The company set a record for memory sales into the server market. Memory demand in Q2 for server is expected to remain strong. Management noted an improved availability of components in mobile. For 2022, memory should see continued strong server demand and a second half mobile recovery.

In summary, what can we make of all this information? The semiconductor stocks are trading as if a recession is imminent, and profits will slowdown. However, demand for semis is holding up, with industry sales steadily increasing. So far this earning season, about 86% of chip companies have reported better-than-expected revenue, compared to 74% for the overall S&P 500 Tech sector, according to data compiled by Bloomberg. Bell-weather chip names trade at bargain-basement valuations, like Micron Technology at 7x earnings, Intel at 10x earnings or top equipment makers Applied Materials and Lam Research both trading at just 13x earnings. Maintain a positive view on semiconductor companies exposed to cloud datacenter spending, 5G infrastructure, and gaming. See a bounce back in the auto/industrial space, followed by near-term weakness in the consumer/PC markets as we head into FY22 earnings.

Is the glass half empty or half full? With the overall markets trading in bear territory, it is often difficult to see a silver lining. However, there are many signposts that point to fundamental strength in the semiconductor sector. But each investor will have to sort through the tea leaves and make their own determination!

Written by Daniel Morgan, Senior Portfolio Manager

Important disclosure information

The views, opinions and positions expressed are those of the referenced authors at the time of publication and are based upon information available at that time. There can be no assurance that any of the beliefs and views expressed herein will prove to be accurate, and actual outcomes or events may vary significantly from those presented. The authors’ views are subject to change and do not reflect the views, opinions or positions of Synovus Financial Corp, who makes no representations as to accuracy, completeness, timeliness, suitability or validity of information presented and will not be liable for any errors, omissions, or delays in this information or any losses, injuries or damages arising from its display or use. The information provided in this material is intended to highlight present economic and market conditions in general. It does not constitute any recommendation, and is not meant for use as personalized or individual investment advice. We encourage you to speak with your financial professional concerning your specific investment goals and risk tolerance before making investment decisions.

Investment products and services provided by Synovus are offered through Synovus Securities, Inc. (“SSI”), Synovus Trust Company, N.A. (“STC”) and Creative Financial Group, a division of SSI. Trust services are provided by Synovus Trust Company, N.A. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc, member FINRA/SIPC and an SEC Registered Investment Advisor. SSI is a subsidiary of Synovus Financial Corp. and an affiliate of Synovus Bank and STC, and STC is a subsidiary of Synovus Bank.

Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. © 2022

Sign up for the Economic Insights eNewsletter

Economic Insights eNewsletter Form