Semiconductors facing a cycle reversal

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by Douglas Busvine

FRANKFURT (Reuters) – Investors who have gambled on the European semiconductor industry to capitalize on the accumulation of innovations in smartphones and advanced vehicles are trapped by the worsening economic environment that is affecting both markets.

The rise of Sino-US trade tensions has caused a sharp slowdown in the automobile industry. At the same time, the smartphone market is slowing after years of strong growth, with Apple itself facing weak iPhones sales and uncertain prospects.

This cycle reversal has erased a quarter of the value of the Stoxx Europe semiconductor index since its peak in June and halted an upward movement during which it has almost tripled since the beginning of 2016.

The continued decline of the European Purchasing Managers' Index (PMI), which reflects the weakness of the powerful German car industry, suggests that the fall in semiconductor stocks in Europe could be prolonged.

Growth in global chip sales is expected to slow to 2.6 percent next year, compared to 15.9 percent this year, according to forecasts from the Semiconductor Industry Association (WSTS).

The turnover of the European market, at 44 billion dollars (38.8 billion euros), represents a little less than one-tenth of the world total.


Investors have hard-hit companies that have not achieved their targets or offer no clear prospects for 2019, despite reassuring remarks about the long-term outlook.

"The market says, 'I do not believe you,'" said Andrew Gardiner, an analyst at Barclays. "This is the classic investor reaction in the semiconductor industry during a downturn."

The slowdown in the automotive markets in North America, China and Europe has led to a series of warnings on the profits of automakers.

This is a blow for the two largest chip manufacturers in Europe, Infineon and STMicroelectronics, knowing that cars account for 40% of Infineon's income and 30% of that of STM.

STMicro acknowledged that "Chinese market conditions were unfavorable" and Infineon said there was "an increased probability of slowing down".

"They have trouble estimating the impact," says Achal Sultania, director of sector research at Credit Suisse.

"The loss in earnings has not been significant but investors are reviewing the multiples they are willing to pay to hold these shares."

More specialized players, such as British optical chip manufacturer IQE, were caught off guard last month by Apple's warning about its sales.

"The last two years have been extremely interesting – the last two or three days have not been at all," IQE CEO Drew Nelson said after announcing a "significant drop" in financial performance. of the group.


Financial analysts have differing views on the near-term outlook for the semiconductor industry, reflecting more general uncertainty about the impact of the US-China trade war and the slowdown in global growth.

Some of them, like David Mulholland at UBS, have lowered their earnings prospects, while maintaining a more positive outlook on companies like Infineon, which specializes in high-end chips.

He believes that the Infineon branch that equips electric vehicles is a strong element of support for the group, which represents up to half of the value of the company.

Pessimists say that with profit growth and margins at historic highs, there is little room for improvement as slowing auto demand and weak Chinese industry weigh.

"You are uncomfortable with high-end smartphone sales volumes, a semiconductor industry that lives or dies by volume, record profits and margins, and headwinds in the automotive and automotive sectors. industry, "says Neil Campling.

Only Dialog Semiconductor, which designs power management chips used in Apple's iPhones, seems to have weathered the negative trend.

Dialog is perhaps the exception that confirms the rule: the Anglo-German chip designer signed a $ 600 million deal in October to, in effect, reduce its exposure to Apple by transferring assets and staff to the American giant of new technologies.

(Juliette Rouillon for French service, edited by Wilfrid Exbrayat)