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  • Can the iPhone rollout lift the industry?

    Semiconductor IP Outsourcing  Wiki-iphone-8.jpgWe are in the midst of a number of cross currents buffeting the industry. The Korea risk seems to have escalated again and our government has thrown fuel on the fire by threatening trade agreements at the most inopportune timing possible. However we are also a week away from the roll out of one of the most anticipated Iphones ever which we all know is a huge driver of semiconductor sales and technology. All of this comes after a relatively lame August of postpartum Semicon and less than stellar earnings outlooks.

    Add to this a hurricane or two and the news flow is certainly mixed. Seasonally we usually see an uptick as back to school and anticipation of holiday sales tends to lift us out of summer technology spending doldrums.

    Korean Krisis Kalamity Kontinues
    We were among the first analysts to put out our concerns about Korea months ago. We suggested that a couple of well placed artillery rounds into semiconductor fabs in South Korea could do a lot of damage to the South without a wider conflict or loss of life but perhaps we underestimated the situation as the North has made a lot more progress on bigger toys since we published our note.

    Our first note on Korea in April

    Our second note on Korea in July

    The risk has clearly increased and has moved well beyond a localized conflict that would be felt primarily in South Korea. Aside from the potential loss of millions of lives in South Korea and beyond, the impact on the economy, especially technology would be huge. The stock market obviously figured this one out today. Semiconductor companies would be front and center in this calamity.

    There is no way to protect a portfolio other than going to cash as almost any company is linked in one way or another, but reducing specific exposure to Korea might be a prudent first step.

    Korean trade pact Kancellation - a Coup de Grace?

    Like there weren't enough concerns about Korea but canceling a trade pact seems very ill timed. We doubt that there would be that much damage as we don't see that much effect that a cancellation would have.

    At best we could see a temporary blip or shipments slow as rules get re-written or un done but its not like the US will stop buying Korean phones or chips or they will stop buying US semi equipment.

    There could be some mildly positive benefit around the periphery for non- Korean phone/chip makers or non-US tool makers but we doubt it would be impactful.

    We see little potential for damage other than the continued degradation of the current administrations image.

    Iphone to the Rescue?

    Amid all the bad geo political news there remains the shining light of the new Iphone launch scheduled for Sept 12th.

    The stocks started to get warmer at the end of August likely in anticipation as the news and rumors continued to heat up. Much is anticipated. We have heard rumors of a 512GB model as well as other things very positive for the semiconductor and tech industries.

    I still have an Iphone 6 and I will be one of the first buyers no matter what, even at a stupid price point. There may be those out there who will be disappointed that the new phone won't cure cancer or walk on water but the odds are high that sales will be very good given current expectations.

    Certainly TSMC has already bought a lot of equipment to make the new 10NM processor and Apple must be buying a lot of NAND further driving that market.

    This new Iphone is perhaps the core of the current semiconductor "SuperCycle" (as mentioned by TEL and others). We don't see any potential disappointment other than Apple not being able to ship enough. The Korean issue could cause a ripple in the supply chain but probably not in the first shipments as that phone stock is already built.

    The euphoria of the new Iphone should lift most boats in the technology space especially semiconductors. The only thing that could drown it out would be an all out conflict in Korea which is less likely in the next week at least....but all bets are off after that.

    A seasonal bounce back
    Normally, technology sales slow down over the summer as people are on vacation or spending money on bathing suits and surfboards not phones and laptops. August is especially bad as all of Europe is on vacation. Back to school is the first positive wave followed by holiday spending later in the fall.

    The semi stocks have shown some signs of life over the past week or so perhaps sensing a seasonal change which typically brings buyers out.

    August was not great as we went through a bit of a Semicon postpartum dip which was exacerbated by less than stellar earnings reports which spotlighted slowing growth. We did end up on a better note as Applied gave a more positive view helped out by display sales.

    A geopolitical conflict could drown out the positive seasonal effect and could be very chilling on holiday sales if we were embroiled in a conflict with people buying "prepper/survivalist" supplies rather than the latest electronic device.

    In a similar sense, we could see spending on electronics slow this holiday season in Texas as many are more focused on rebuilding their homes than buying the latest Iphone.

    Fundamentals remain rock solid
    Even with all these cross currents, the underlying fundamentals of the semiconductor industry remain very solid. Memory pricing and demand are great. Equipment sales remain very strong. Technology continues to be pushed along though one means or another. IOT, big data, AI, VR & AR are all pushing technology and semiconductors at an ever increasing pace.

    This creates a bit of a "reverse duck metaphor" scenario where things appear to be unhinged & stormy above the surface of the water but technology is calmly paddling along under the waves.

    All this suggests that when things calm down again that we will still be in a very positive position for technology and semiconductors over the long run.

    Collateral impact and ordinal investing the stocks
    We continue to like Micron as a winner no matter what and we might like it even better in a pair trade teamed up with a Samsung short.

    Equipment stocks could get rocked in the near term but could then be a buying opportunity as things recover. Although the stocks have behaved better of late (except for today) we would still wait for a better buying opportunity as the negative news is far from over.

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