Early chip earnings provided a sigh of relief, but two more big tests are coming

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Early chip-industry earnings reporters have provided a sigh of relief in a sector where many companies have slashed forecasts, but there are more big tests in the days ahead.

Texas Instruments Inc.
TXN,
+3.90%

is scheduled to report third-quarter earnings after the close of markets on Tuesday, and represents a first look at a chip maker immersed in the automotive and industrial sectors, one of the few that has yet to see a huge drop-off in demand as semiconductors switched from a shortage to a glut in 2022. The next day, KLA Corp.
KLAC,
+4.92%

will help determine the course of the chip-making equipment manufacturers with its own report.

In a recent note, B of A Securities analyst Vivek Arya said that Texas Instruments’ report is crucial as its outlook could “stir” the auto and industrial chip makers like NXP Semiconductors NV 
NXPI,
+4.47%
,
Microchip Technology Inc. 
MCHP,
+4.37%
,
and Analog Devices Inc.
ADI,
+3.17%

“This subsector could get rattled next week when leader Texas Instruments reports, and per its historical practice modestly beats Q3, but then potentially issues a conservative Q4 outlook (sales likely guided down 6-10% vs cons. -4% QoQ, given higher consumer exposure), confirming cycle concerns,” Arya said.

“If conversely, Texas Instruments’ guidance is strong, it could surface concerns about an inventory build mainly because the current macro concerns trump individual company views, especially for highly cyclical diversified chip makers with limited visibility,” Arya said. 

Analysts surveyed by FactSet estimate earnings of $2.39 a share on revenue of $5.13 billion based on Texas Instruments’ forecast of $2.23 to $2.51 a share on revenue of $4.9 billion to $5.3 billion. For the fourth quarter, analysts expect earnings of $2.24 on revenue of $4.95 billion.

Read: Chip stocks could suffer worst year ever as effects of shortage-turned-glut spread

Shares of Texas Instruments rank as one of the best-performing chip stocks to date with its loss of 15%, compared with a 41% drop in the PHLX Semiconductor Index
SOX,
+3.70%
,
and a 21% decline in the S&P 500 index
SPX,
+2.37%
.
Meanwhile, KLA shares are down 32%.

KLA is under a bit of pressure to produce not just strong results but a strong outlook as well, following last week’s reports from Lam Research Corp. 
LRCX,
+3.77%

and Netherlands-based ASML Holding NV
ASML,
+5.71%

that showed both companies exhibiting strength while noting the many challenges that face the industry.

All three companies serve the semiconductor fabrication market, the companies that make the silicon wafers like Taiwan Semiconductor Manufacturing Co.
TSM,
+0.27%

that companies like Nvidia Corp.
NVDA,
+2.23%
,
Advanced Micro Devices Inc.
AMD,
+1.82%
,
and Apple Inc.
AAPL,
+2.71%

use to make to make chips.

Recently, TSMC said it would trim its capex budget for 2022 by about $5 billion following a string of quarterly hikes.

Read: Taiwan Semi rallies as exposure to China restrictions minimal, capital spending cut

B of A ‘s Arya, who counts KLA as his favorite in the space, expects impacts from the company but not as bad as Lam Research, which estimated a hit of up to $2.5 billion in 2023 from China restrictions, or about 15% of its last reported full-year of revenue.

“We expect peers KLA to also be impacted, though by a lower 3-5% or $80-$130mn quarterly level,” Arya said. “On the other hand, we estimate peer Lam’s exposure is likely greatest, closer to 7-8% of sales or $350-$400mn/quarter given its higher memory exposure. Near-term, Lam’s deferred revenue balance could help offset the China impact.”

Analysts expect fiscal first-quarter earnings of $6.21 on revenue of $2.6 billion, based on KLA’s forecast $5.70 to $6.80 a share on revenue of $2.6 billion. For the current fiscal second quarter, analyst forecast earnings of $6.14 a share on revenue of $2.58 billion.



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