Via Wolf Street

According to chip makers, the plunge isn’t over yet. Now hoping it won’t turn into the mess as in 2001 when the last tech bubble became the dotcom bust.

Global semiconductor sales dropped 15.5% in the first quarter, from the fourth quarter last year, to $96.8 billion, the World Semiconductor Trade Statistics (WSTS) organization reported Monday afternoon. The three-month moving average in March has now plunged 25% from the three-month moving average at the peak last October, the deepest plunge since the Financial Crisis:

The explosive growth in semiconductor sales that started in 2017, with a final spike last fall, has created an inventory glut that is now being brutally unwound in the face of soft demand. Sales in March, on a three-month moving average basis, were back where they’d first had been in April 2017.

The 25% plunge from October, in percentage terms, is still less than the plunge from peak to trough during the Financial Crisis (-39%) and the infernal 11-month long plunge during the dotcom bust that bottomed out in September 2001 (-45%). But given the recent guidance from chip makers, the trough of the sales slump in this cycle may still be in the future.

Demand was down across all regional markets: The global 15.5% drop in sales from Q4 2018 to Q1 2019 split up regionally this way – and the problem isn’t just China:

  • Americas: -29.2%
  • China: -14.5%
  • Japan: -13.8%
  • Asia Pacific/All Other: -10.4%
  • Europe: -3.1%

There are numerous reasons for this mess, not just one.

It is likely that efforts to front-run potential tariffs have contributed to the blistering surge in sales since early 2017 and to the subsequent inventory glut.

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The global stagnation in smartphone sales last year, including the drop in iPhone sales, when sales were supposed to rise further, didn’t help.

Data centers that power the “cloud” where supposed to be an endless-growth business for chip makers where not even the sky was the limit. But Intel has been warning since January that sales of chips for data centers started slowing in the fourth quarter. Last week, Intel reported that quarterly revenues from its data-centric business fell 5% year-over-year.

The collapse in demand in 2018 from the crypto-mining sector triggered sales swoons in semiconductor makers, such as Nvidia, that specialize in those chips.

There are other factors. It’s not just one thing that is causing this plunge in chip sales, but a series of events – on top of an inventory glut.

And it doesn’t appear to have bottomed out just yet. Semiconductor makers have lowered their guidance for the next couple of quarters, including Intel, whose CEO Robert Swan said last week in the earnings report, “Looking ahead, we’re taking a more cautious view of the year, although we expect market conditions to improve in the second half.”

For now, everyone in the sector is hoping that the chip glut will be worked through by the second half, and that demand will pick up again in this infamously cyclical sector, and that it doesn’t turn into the long-drawn-out 45% collapse of chip sales experienced after the implosion of the last tech bubble that led to the dotcom bust.

The broad inventory pile-up in the US, a result of a six-quarter surge, shows first signs that some of it has started to unwind. Read…  How the Inventory Pileup Boosted Q1 Blowout GDP and What Carmageddon Has to Do with It

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