People are hoping for a back half pickup but we keep catching more and more datapoints that tell you it’s not happening. Things are getting worse. There’s some shoes to drop come Q2 reports and Q3 guidance. Micron (NASDAQ:MU) being so exposed to tech demand trends has more risk ahead. Memory is in everything. As tech goes so goes Micron and vice versa. They are indicators of one another. Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) along with Micron appear to all be in the same boat.
You Heard What Western Digital Just Said?
Western Digital (NYSE:WDC) was at the Bank of America Global Tech conference. They said NAND prices were dropping fast and they were scrambling to cut costs to keep up. Cash flow is deteriorating. Industry inventory levels have not cleared. WDC also said the loss of Huawei “throws a wrench” in the second half pickup plans.
WDC is of course focused in NAND which is about one-third of Micron’s business. That’s clear risk exposure for Micron’s upcoming earnings report.
Pricing drives gross margins which is probably the most important input to the Micron income statement. I have earnings going negative for Micron in the next few quarters (full model: paywall).
DRAM and NAND can move in unison based on overall tech demand so generally NAND can tell you about DRAM as well.
DRAMExchange called for NAND prices to fall “non-stop.”
You Heard Lam?
Lam Research (NASDAQ:LRCX), at a recent BofA conference, said that memory is running below their forecasts. They hinted their memory customers probably aren’t going to see supply growth lower than demand growth until year end.
Supply is still growing too fast.
That aligns with reports we’ve shown about rising inventory levels.
I’ve pointed out this rising inventory situation on several recent reports.
Rising inventories are a big risk. Rising inventories at Nvidia helped us call out an earnings miss for Nvidia in November.
You Saw Semi Sales In April?
I’ve said this in past reports, things getting worse is not a sign of a second half pickup. It’s telling you there’s a near-zero chance for a second half pickup. We’ll likely see back half guidance slashed in about a month when companies report.
General Slowdown In Tech Taking Place: Intel and Nvidia
In a report just out by Digitimes, they said,
“As suppliers for the cloud computing datacenter segment are still clearing their inventory, and US-China trade tensions have created uncertainties, demand for datacenter servers has been decreasing since early 2019 and may cause Intel’s datacenter business group to suffer its first on-year revenue decline in 10 years in 2019.
….The US sanctions against Huawei has also undermined the server revenues of Intel and Nvidia as both have been major suppliers of the China-based company. China reportedly plans to boycott products from US-based chip suppliers including Intel. China has contributed around a quarter of Intel datacenter business group’s revenues.”
If China actually follows through with a US product boycott, look out.
As for Nvidia, if you heard them speak today at Bank of America you’d probably agree they are still slow. Remember they pulled their annual guide on last earnings call because of slow datacenter business.
Today at the BofA conference they said that they are being affected by the “broader capex” slowdown and that customers “paused.”
I took that as a real-time update of them backing off guidance on their earnings call a few weeks ago.
And look at Nvidia’s inventories in the face of that “pause.”
Ouch. That up 79% inventory level is vs. revenues that were flat last quarter. Inventories are building and not clearing.
That tells you there’s still big inherent risk at Nvidia and its peers when Nvidia needs to clear that inventory.
As for Intel, we heard from Morgan Stanley that Intel apparently told them their back half pickup plans were waning. That’s after Intel publicly expected a back half pickup on last earnings. Sounds like things slowed since then.
Morgan Stanley heard something from Intel. Listen to what they said,
“In addition, we are now hearing from many leading semiconductor (INTC, Microchip (NASDAQ:MCHP)) and industrial companies (Caterpillar (NYSE:CAT), Deere (NYSE:DE)) that the second half recovery many are counting on is looking less likely.”
But Intel said this on their last earnings call,
“…demand will improve in the second half.”
But now Morgan Stanley apparently “heard” from Intel that back half pickup is “looking less likely.” That has consequences for many others in techland.
Improvements are built into Intel’s reduced guide. Not good. More shoes to drop.
AMD (NASDAQ:AMD) may be taking some of that share but the general trend is headwinds led by trade tensions.
Tech is a food chain. That food chain of companies sell into each other, against each other and alongside each other. When there’s problems at one you know there’s a chance of risk at another.
But when there’s constant confirmation of risk at multiple major vendors you have to take a more cautious view on the space and it’s constituents.
That’s where we are now.
The only thing that will save the stocks is if Trump and Xi agree to a truce. That truce however keeps getting pushed out so you have to be objective. So far it’s not happening.
Shoes to drop.
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