Chip scare tempered by IDC’s long term growth outlook

Predictions of a downturn in chip sales in coming months have Wall Street investors concerned, but long-time industry analyst Mario Morales believes the five-year outlook is still bright.

“I’m still optimistic where the semiconductor industry is five years from now after overcoming a year of pain in the market,” said Morales, IDC group vice president for semiconductors, in an interview with Fierce Electronics.  “After 30 years covering this industry, semiconductors consistently miss the timing when they introduce new capacity” as has happened during the pandemic.

Morales believes a chip inventory correction widely predicted by financial analysts, including at Citigroup and Northland Securities, could last a year and arguably already started near the beginning of 2022. The bottom could be reached in the first quarter of 2023.

 OEMs that make PCs and servers relying on chips started buying up the devices in bulk during the early days of the pandemic in 2020 to meet the needs of workers and students doing tasks at home and cloud companies trying to beef up their data centers to meet high demands for internet usage. More recently, those OEM customers have begun “pushing out the excess” of their chips, which lessens the amount they buy from chipmakers, in some cases by a dramatic amount.

Intel’s poor earnings report on July 28 marked the start of the recent scare, Morales believes. “People began to get spooked by Intel’s latest earnings. Their miss was so large and unexpected,” he said.

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“Everybody has known the demand environment is weakened, especially because China has been locked down and was going to be material on earnings,” he added. “What it points to is the reality that the macro environment is extremely volatile with geopolitics. Anything in consumer buying is facing slowdown considerably.”

As the first quarter of 2022 started, PC and smartphone buying declined with those device makers pushing back on orders they had planned.  Some smartphone and PC makers had increased orders in 2021 and built up inventory, then they reversed course in 2022.  “When two key markets are going down while inventory is built up, some chip suppliers get nervous,” Morales said.

The inventory correction will accelerate in the fourth quarter, he said.  If a bottom is hit in the first quarter of 2023 as he predicted, “I’m not sure after recovering if it will rebound as fast as it did in 2020” after a 2019 correction.

One significant factor in a recovery will be China, which consumes almost one-third the globe’s semiconductors. Chinese officials are talking about stimulating the chip market going into 2023, which could have an impact globally, Morales said.

A recent IDC forecast shows global chip revenues increasing each year into 2026, going from an estimated $638 billion in 2022 to $745 billion in 2026. Even if the inventory correction hits bottom in 2023, the overall year is estimated to be up 6% from 2022, according to IDC.

bar chart of chip revenues into 26

Some analysts believe global revenues are on course to exceed $1 trillion in 2030

In February 2021, the Semiconductor Industry Association convened analysts and experts for an online discussion of the future of the chip industry which was in the early throes of significant chip shortages, especially for cars.  At the time, Dale Ford at Electronic Components Industry Association, predicted chip sales would reach $750 billion by 2030 and $1 trillion in 2036.

Part of the concern recently over a chip inventory correction by Wall Street analysts is based on their need to inform investors to reduce their holdings in chip companies and buy them back at the bottom for subsequent gains, several analysts said. 

“You’ll see a lot of mixed messages from these chip companies,” Morales said.

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