The recent gloomy demand forecast from Broadcom (NASDAQ 🙂 ensured that investors in chip stocks received another ominous signal. The broad product line and the worldwide customer base make the chip maker an important indicator for the future. Unfortunately the news is not good.
The San Jose, California-based company, after a close market on Thursday, not only lowered its annual forecast, but also warned that the US-China trade dispute was causing "sharp and rapid contraction" on behalf of customers, including the largest smartphone makers, such as Apple (NASDAQ 🙂 and Chinese telecom giant Huawei Technologies.
Broadcom is also one of the leading suppliers of network components used by large data center operators such as Alphabet & # 39; s (NASDAQ 🙂 Google and Amazon.com & # 39; s (NASDAQ 🙂 cloud division. Following the US ban on exports to Huawei, Broadcom is likely to suffer a blow of $ 2 billion in its annual sales, a much larger number than expected.
"It is clear that the US trade dispute between the US and China, including the Huawei export ban, creates economic and political uncertainty and reduces visibility," said Chief Executive Officer Hock Tan during a conference call, Bloomberg said. "Our customers are actively reducing inventory levels."
Broadcom, which said the reduced yield forecast is still & # 39; very conservative & # 39; is one of the first chip makers to quantify the impact of the escalating trade war between the US and China. There is no doubt that this also offers a grim prospect for other semiconductor supplies.
Broad questioning
The shares of Broadcom fell by as much as 9% in Friday trading, before regaining some ground to close 5.6% at $ 265.93. The share has only increased by 5% this year, compared to the 18% gain in the industry benchmark
The company's latest revenues, plus the weak performance of other top chip companies, confirm our earlier bearish call to the industry. Semiconductor companies have connected much of their growth to China, where spending on gaming and artificial intelligence has fueled demand for their products. A slowing global economy, in particular a more pronounced slowdown in China, will continue to keep demand under pressure this year.
The latest Broadcom guidelines also show that the cross-talk between the US and China is not the only reason why demand is slowing down and that the weakness is probably wider. According to the chip maker, the equipment manufacturers to which it supplies parts even reflected purchases before the Huawei ban and $ 2 billion deficit reflected the possibility of a more pronounced contraction
Bottom Line
With almost all of the major revenue reports from major chip manufacturers, it is very clear that this is not the time to buy chip stocks. This year's rally in these stocks was based on a very weak bottom and we see this profit evaporating as other top players follow Broadcom and lower their revenue forecasts. A scenario in which demand could quickly rise for chip producers is, in our opinion, too optimistic. Investors would do well to stay on the sidelines.
