On Thursday, SMIC, China's largest chipmaker, reported a sharp 80% decline in profits as the semiconductor industry continues to struggle. The company, which is the country's largest foundry, producing computer chips created by other businesses, stated on Friday that the high product inventory issue that started in the third quarter of 2019 has improved and has been reduced to a reasonable level.
SMIC, or Semiconductor Manufacturing International Co., saw its third quarter net income decline by a staggering 80%, significantly worse than the 64% drop posted in the previous quarter. The firm reported revenue of $1.62 billion, a 15% decrease from the same period a year ago, which came in below analysts' projections of $1.625 billion. Net income for the quarter was $93.98 million, far less than the expected $165.1 million. This considerable decline is being attributed to weakened global demand and a drop in demand for certain chips, such as memory, which has impacted SMIC as well as its Asian competitors TSMC and Samsung. According to SMIC, while inventory problems in China have been mitigated, the inventory levels of American and European customers remain historically high.
Consumers have been reducing their expenditure on consumer electronics as inflation rises. This has left smartphone and PC companies with too many semiconductor chips in storage, leading to a decline in memory chip prices. SMIC, which also produces car chips, commented that stockpiles of these chips are currently very high, following a period of three years of shortages. Consequently, their major customers are placing tighter orders. The chipmaker added that, after a turbulent market in the past year, customers are reverting to a more conservative approach compared to their expansion two years prior.
Investors who are focused on growth may have underweighted the Magnificent Seven, but one tech giant was liked. Citi is optimistic about a portion of the semiconductor market and has identified its preferred stock picks. According to Jefferies, Tencent, Alibaba and more show promise in terms of buybacks and investment opportunities. With the end of the year approaching, Morgan Stanley's Slimmon considers whether the S&P 500 will rally and which Big Tech stock has the most potential.
A growth investor is not as heavily invested in the Magnificent Seven, but does favor one specific technology giant. Citi is optimistic about the potential within a subset of the semiconductor industry, with their top stock choices identified. Jefferies has expressed that Tencent, Alibaba, and other companies are ideally positioned for potential stock buybacks, suggesting now is a good time to get involved. Finally, Morgan Stanley's Slimmon has commented on whether the S&P 500 will see gains by the end of the year and has selected a well-known tech player as a stock to watch.
The Semiconductor Industry Association reported a 1.9% increase in global semiconductor sales for September when compared to the previous month, marking a continuation of the seven month chip recovery trend. Despite this positive news, there was a 4.5% decline in September sales compared to the same month of the previous year.John Neuffer, President and CEO of the Semiconductor Industry Association, expressed his confidence in the outlook of the chip market. "The long-term outlook for semiconductor demand is strong, with chips being a necessary component in many of the products we use every day, as well as allowing for the development of new and innovative technologies," he stated.The September launch of a 5G chip designed by Chinese tech giants Huawei, which is manufactured by SMIC, was an important milestone in the semiconductor industry.
The U.S. imposed sanctions on Huawei, which prevented their government agencies from obtaining the Chinese company's equipment or services. Consequently, Huawei was added to the U.S. trade blacklist, restricting American firms from doing business with them. The U.S. also limited Huawei's access to foreign-produced semiconductors made with U.S. technologies. In 2020, SMIC found itself in a similar position as it was placed on the U.S. trade blacklist, which would require exporters to obtain a license to sell to the company.
In spite of U.S. measures to cut Huawei off from key technologies including 5G chips, Huawei's newest Mate 60 Pro smartphone featured a Kirin 9000s chip fabricated by SMIC that appears to support 5G. This 7-nanometer processor is a sign of China's progress towards self-reliance in science and technology, despite the U.S. attempting to contain Beijing. Although SMIC's technology is lagging behind TSMC and Samsung, its fourth quarter revenue is expected to grow by 1% to 3% compared to the third quarter.
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