Chip market troubles pose threats beyond Nvidia Corp and AMD following AI euphoria.

Febin MathewDecember 11, 23 nvidia

Investors have been caught up in the AI stock frenzy this year, but this has overshadowed the challenges faced by the semiconductor market. While companies like Nvidia Corp. and Advanced Micro Devices Inc. have garnered much enthusiasm, the overall situation for investors is more complex.

Recent earnings pointed to a slump in the industrial and network chip markets, while some on Wall Street are bracing for the impact of a potential economic downturn on automotive chips. Smartphone components and personal computers appear poised for recovery, according to Samsung Electronics Co. and Intel Corp.

“It’s important to avoid half-painting with a broad sector brush,” said Brent Fredberg, portfolio manager at Brandes Investment Partners. “The concern is that now may be the time for the industry to melt down excess inventory.”

Broadcom Inc., which has gained 62 percent this year, is scheduled to report earnings late Thursday. Its performance and outlook should provide a window into the various forces driving the industry’s outlook. While it makes networking equipment and some custom chips that have played a role in the massive investment in AI infrastructure, the company has a wide range of products for automotive, industrial equipment, data centers and smartphones.

Deviations between boom and bust are nothing new to the industry. Chipmakers have consistently failed to reconcile long-term planned introductions of new supply with short-term fluctuations in demand, often creating a vicious cycle. Just two years before a pandemic shortage caused widespread panic throughout the economy, chipmakers and their customers were overwhelmed with inventory and orders dried up. Now some of them are in the same boat again.

“Automotive and industrial end markets remain in the midst of a cyclical recovery as customers liquidate their inventories, which we expect to be at their lowest levels over the next 4 months,” Angelo Zino, vice president and senior equity analyst at CFRA Research, wrote in a report. While smartphones and computers appear to be establishing themselves, “will this momentum last until 2024,” he added.

Many industry executives have argued that demand for semiconductors in so many products provides some insulation against downturns. But the different behavior of that more diversified market has made timing the cycle difficult.

Philadelphia Stock Exchange Semiconductor Index trailing Texas Instruments Inc., down 5.6% this year, has one of the broadest customer and product portfolios in the chip business. According to it, the main industrial market weakened in the third quarter and shrank by around 5%. The turnover related to communication components decreased by more than 10%.

Elsewhere, the rapid growth in demand for car chips may have exceeded that. According to Pierre Ferragou, an analyst at New Street Research, the third quarter was the fourteenth consecutive quarter in which automotive semiconductor revenue has exceeded forecasts. The number of chips per car continues to rise, but “has begun to normalize,” he wrote in his report. Automakers are no longer adding to inventory, while auto dealerships have a record number of vehicles on consignment — indicating the likelihood of a fix, he wrote.

Still, some companies seem to be at their worst. Micron Technology Inc., the largest U.S. maker of computer memory semiconductors, raised its first-quarter revenue guidance late last month, citing an improved price environment now that a slump in PC and smartphone demand is fading.

Systems built around Nvidia processors need memory and many other chips to support them, according to Thomas Martin, senior portfolio manager at Globalt Investments. But that doesn’t make them immune to the next downturn.

“Every time you say that about chips, they always surprise you and the cycle happens anyway,” Martin said. “So you have to be careful.”

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