Assessing the Semiconductor Cycle by Looking at the Latest Earnings Reports of TSMC, Micron, and Lam Research
Despite softer forecasts from TSMC's Q2 earnings call, attributed to overall macroeconomic conditions, our further research into developments observed across segments of the semiconductor industry indicates that the current cycle is nearing its trough.

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At its earnings call on July 20, Taiwan Semiconductor Manufacturing Company (TSMC), the world’s leading foundry, further revised down its guidance for the foundry industry to -14~16% (prior: -7~9%) and guidance for full year revenue to -10% (prior: -4~6%), citing weak global economic conditions. The company also noted that it now anticipates the bottom of quarterly revenue to occur in Q3 instead of Q2.

In the wake of the earnings report, TSMC’s share price ended the week with a loss of over 5%. Despite the market reaction, we believe there are reasons to avoid being overly pessimistic:


1. Consumer electronics leading the recovery, semiconductor to catch up in Q4

Although TSMC revised down its annual guidance for the foundry industry, the company maintained its -4~6% growth forecast for the semiconductor market (excluding memory) in 2023. This suggests that while the midstream foundry segment is still on its downturn due to price cuts and inventory adjustments, other segments of the semiconductor industry have gradually bottomed out and are starting to recover. This pattern is similar to what we have observed in the electronics industry in Taiwan.

As shown in the chart below, year-on-year growth in inventories of two segments that are representative of consumer electronics, namely electronics parts & components and computer & peripheral equipment, have decreased significantly, indicating successful inventory depletion. Year-on-year revenue growth in these areas has also started to bottom out and stabilize. Historically, the consumer electronics cycle usually leads the foundry (semiconductor) and equipment (electrical machinery) segments by 2~3 quarters. As a result, we can expect these segments to pick up in the second half of the year, reflecting sector rotation.

2. The memory industry has passed its trough

The memory industry, which is sensitive to semiconductor cycles, saw leading player Micron Technology reporting a Q2 revenue that beat estimates ($3.75bn vs. $3.65bn) and an optimistic forecast for the coming quarter ($3.9bn vs. 3.87bn). On top of that, Micron noted that customer inventories in the PC and smartphone segments are now close to normal levels, and inventories of data center customers are also improving. In end market demand, the company anticipates stronger growth in per-unit memory content driven by consumer shift towards high-end phones and expects demand to grow in the coming quarter as customers launch new products during the second half of the year. The company also expressed increased confidence that the memory industry has passed the bottom for quarterly revenue and revenue growth.

3. As a lagging indicator, semiconductor equipment billings are nearing a bottom as well

Reflecting chipmakers’ capital expenditures, semiconductor equipment billings usually lag behind the overall semiconductor cycle and thus can be used to evaluate whether the cycle has bottomed out. As shown in the chart below, global semiconductor equipment billings have stabilized, both in terms of shipment value and year-on-year growth.

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