- Semiconductors will have a tough going in 2019 due to weaker end-demand trends, inventory adjustments, and China trade issues, RBC said.
- Two chip giants, AMD and Nvidia, have been under pressure amid concerns of excessive processor inventories as the crypto boom turned into a bust.
- Leading memory suppliers such Micron Technology and Western Digital are well below their recent peaks because of fierce competition in the memory industry.
- Meanwhile, regulatory pressures on semiconductors are also heavy as Broadcom's takeover of Qualcomm and Qualcomm's bid for NXP both failed last year.
Semiconductors names will have a tough 2019, according to one Wall Street firm.
"We see 2019 (especially the first half) being more challenging given weaker end-demand trends, inventory adjustments and china trade issues," RBC analyst Amit Daryanani said Friday in a note titled "Semiconductors: 2019 The Hangover Year?"
Many semiconductor providers have been under pressure since the stock market's "Red October." Notably, chip giants AMD and Nvidia tanked 37% and 53% during the past three months amid concerns of excessive processor inventories as the crypto boom turned into a bust. While Nvidia and AMD have suggested that the cryptocurrency overhang will be a one-quarter issue, experts have forecasted their crypto problems will persist longer than expected.
But semiconductors have also seen softness in the memory market. Shares of Micron Technology, a leading memory supplier, have lost half of their values since peaking in late May. Similarly, Western Digital has plunged 65% from its all-time high set in March.
The weakness in memory is mainly because the industry "remains highly competitive" and players need to make substantial investments to maintain their market share, Daryanani said.
"We see risk that total semiconductor revenues are down in 2019 by low-to-mid single digits though much of this is attributed to memory headwinds (Excluding memory total semiconductor sales will end-up flat to up modestly)," he added.
Besides industry headwinds, regulatory pressures on semiconductors are also heavy. In March, President Donald Trump blocked the $117 billion Broadcom takeover of Qualcomm on national security grounds. And in July, Qualcomm' $44 billion bid for NXP collapsed as China, the ninth and the last global antitrust regulator needing to approve the deal, hesitated due to ongoing trade tensions.
Given the challenges surrounding these recent deals, 2019 is unlikely to be a good year for mergers and acquisitions as investors are unlikely to discount execution risk, especially given a slowing macro environment, Daryanani said.
He added that global competition in next-generation networking and aerospace would be good news for the industry.
"Positively, we see networking (5G) spend being a sustained tailwind in 2019 and see companies with high aero/defense exposure managing the downturn better," he said.
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