What happened
Shares of chip stocks Intel (INTC -9.20%), Broadcom (AVGO 3.84%), and semi-cap equipment maker Applied Materials (AMAT 2.98%) were falling on Friday, down as much as 2.7%, 2.9%, and 4.7% at their lows of the day, respectively.
These all-star semiconductor stocks had been on a tear this year, with Intel and Applied Materials rising about 50% and Broadcom up about 58% on the year amid artificial intelligence (AI) enthusiasm and the hopes the broader semiconductor downturn may be ending.
But these stocks had a big pullback on Friday, after Reuters reported that Taiwan Semiconductor Manufacturing (TSM 1.26%), the largest chip foundry in the world, had asked equipment makers to delay or push back orders of new equipment.
So what
TSMC is the largest outsourced chip foundry in the world, so many look to its commentary as a barometer of the health of the semiconductor industry. TSMC manufactures many of Broadcom's chips, and even some of Intel's non-CPU chips, despite Intel also being a competitor. And TSMC obviously is a buyer of Applied Materials' equipment used to produce both leading-edge and trailing-edge semiconductors.
According to Reuters, which broke the story, sources said the equipment delays were centered around the company's new fabrication plant it's building in Arizona, which had been plagued by delays and supply shortages. However, those same sources also apparently said the company was cautious about demand, indicating it was not just a supply problem. When the suppliers, of which Applied Materials is one, were asked for comment, they told Reuters they expect the delays to be "short-term." Meanwhile, TSMC itself declined to comment, calling the story a "market rumor."
The story seems a bit wishy-washy and it's unclear if this delay marks another step down in semiconductor demand, or if it's just confirming the slowdown TSMC had already disclosed to the market back in July.
On that earnings call with analysts, TSMC said it expected capital expenditures to be at the lower end of its previously stated $32 billion to $36 billion range amid soft demand and cautious inventory management by customers. So, today's rumor could be either confirmation of that, or a suggestion that capex may actually fall below $32 billion.
The world's largest foundry may be pushing out orders for semiconductor equipment. Image source: Getty Images.
The slowdown may confuse some, as all indications are demand for artificial intelligence chips is booming, and TSMC produces Nvidia GPUs and other accelerators needed for generative AI applications. However, AI chips only accounted for about 6% of TSMC's overall revenue last quarter. Therefore, the sharp slowdown in the larger and more mature PC, handset, and industrial sectors, especially for customers in China, is having an overall dampening effect in spite of strong AI demand.
Some might have thought recent bullish comments from the likes of Intel on a PC market bottoming may have indicated a rebound may be around the corner, but if these rumors are true, it appears that recovery may not be materializing as strongly as thought.
Now what
It is also possible that TSMC may be seeing lower demand as a result of China's largest foundry, Semiconductor Manufacturing International Corporation (SMIC), taking some share away. Last week, Chinese tech giant Huawei released its Mate 60 phone, featuring a homegrown 7 nanometer chip made by SMIC that surprised many, since SMIC wasn't supposed to be able to make advanced chips amid U.S. sanctions.
In any case, SMIC still used equipment by Applied Materials and other U.S. equipment makers. So, if that were the case, it wouldn't be as bad for Applied, even though it's down the most today.
But if demand is the problem and this semiconductor down cycle is bit prolonged, there are still reasons to be bullish on all three of these stocks over the long term.
Applied has shown this year it has been among the most resilient in its group. The company is the most diversified equipment maker, and has made smart investments over the years behind the strongest growth trends of AI and electrification. Meanwhile, Broadcom actually just saw a big insider buy, and has some exciting demand opportunities ahead in networking for AI computing. And Intel may do well relative to its low stock price, as there are indications its turnaround under CEO Pat Gelsinger may be taking hold. Intel may also perversely benefit from increased U.S.-China tensions.
Semiconductor stocks are prone to large daily moves like today; however, if you zoom out over the longer term, sector leaders have handily outperformed the market -- as long as they don't fall behind on technology or miss out on key trends. If you can bear the cycles, these stocks still look like buys for the long term on this pullback.
