TER - 'Weak' IT spending in March may have impacted chips: UBS

2023-04-24 09:33:17 ET

Investment firm UBS said on Monday that a number of data points suggest IT spending budgets saw "incremental pressure" in March, potentially a negative for the semiconductor industry.

Though analog companies and other chip companies such as Broadcom ( AVGO ) have benefited from longer lead times, recent comments from companies such as CDW ( CDW ), IBM ( IBM ), Seagate Technology ( STX ) and others support a "weakening enterprise environment," analyst Timothy Arcuri wrote.

On the contrary, wafer fab equipment companies should benefit from rising demand out of China, as commentary from Applied Materials ( AMAT ), ASML ( ASML ) and Lam Research ( LRCX ) is "clearly indicative of a substantial inflection in equipment demand from China for lagging edge process nodes," though it's unclear how much of it is real demand.

Arcuri added China is likely to represent roughly $20B, or more, in wafer fab spending, which could be more than the $8B that was lost from the U.S. export controls placed on the Chinese semiconductor industry by the Biden Administration.

The analyst also weighed in on several companies slated to report first-quarter results soon, including Texas Instruments ( NASDAQ: TXN ), Intel ( NASDAQ: INTC ) and ON Semiconductor ( NASDAQ: ON ).

Entegris: Arcuri said Entegris ( ENTG ) is likely to issue downside guidance based on Taiwan Semiconductor ( TSM ), given that the global foundry is Entegris' largest customer.

"We do believe ENTG could point to some recovery in [second-half] but we expect commentary to remain generally muted," Arcuri wrote in an investor note.

Arcuri added that if Entegris ( ENTG ) can sell the electronic chemicals business, it could help de-lever the company and return to "being a solid compounder with a fairly unique story for a stock."

Teradyne: Arcuri said Teradyne's ( TER ) March results should be "in line with expectations" and the June quarter should be "fine," given that the company offered conservative commentary.

"The debate here is really more on 2024 as Apple should make a wholesale migration to 3nm for all iPhone SKUs as well as the M series and TER is also well positioned to win new business at AMZN and TSLA which would start to hit next year," Arcuri wrote in the note, adding that Apple ( AAPL ) is likely to generate more than $780M in revenue for Teradyne, potentially as much as $1B.

Texas Instruments: Acruri said recent data checks suggest Texas Instruments ( TXN ) is likely to report "slightly below" the mid-point of guidance for both revenue and earnings, even as its industrial markets are lending support.

"We expect TXN to continue to manage its business for the long-term and invest counter-cyclically, while likely also benefitting from CHIPS Act/ ITC offsets (which we are modeling at ~20% through C2025)," Arcuri wrote.

ON Semiconductor: Arcuri said ON ( ON ) is likely to generate in-line results, given that the company guided down 20% sequentially after its last earnings call.

"The [silicon carbide] story remains a focal point for investors and we expect this to remain the case for the foreseeable future, as ON continues to reiterate its ~$1B revenue goal for 2023, with 2024 likely shaping up to be another solid year of growth (we think in the range of ~$350-400MM incrementally Y/Y)," Arcuri wrote.

KLA Corp: Arcuri said KLA Corp.'s ( KLAC ) results and guidance should be "okay" and not as bad as Lam Research ( LRCX ), given that it is likely to benefit from the lagging edge demand from China.

Western Digital: Arcuri said there is some "downside risk" to Western Digital's ( NASDAQ: WDC ) results after Seagate's ( STX ) results earlier this month, which showed nearline EB shipments have not yet recovered and the macro backdrop looks to have "deteriorated quite a bit" in March.

Arcuri added the biggest debate for the stock is whether it has to pay a tax payment of as much as $700M while the company has a "very tight" free cash flow position.

"Some investors continue to note that the market is implying little to no value on WDC's NAND business after taking into account the comparable value of its HDD business based on STX's, but neither WDC nor Kioxia has much liquidity, meaning that any deal to  separate the NAND business would likely need to be completely recapitalized with a big cash injection," Arcuri explained.

Intel: Arcuri said Intel's ( INTC ) first-quarter results should be "fine" despite the challenging broader environment for IT spending.

"We remain confident on the longer term manufacturing roadmap (as evidenced by the recent decision to put Clearwater Rapids on Intel 18a) and this is ultimately the key debate for the stock," Arcuri wrote.

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