Semiconductor contract manufacturer Taiwan Semi (TSM) released Q1 results that were below expectations and guided down the current quarter and, per Bloomberg; “cut their cut its own 2016 smartphone demand growth forecast to 7 percent from 8 percent previously.” TSM management made some comments about the changing landscape for smartphone sales, as growth in the developed world for high-end offerings has ground down to a halt, again from Bloomberg:
TSMC and other smartphone suppliers are grappling with the most pronounced slowdown in mobile demand on record. Apple expects its first revenue decline in more than a decade and worldwide smartphone sales in 2016 are expected to rise by a single-digit percentage for the first time, according to Gartner Inc. On Thursday, TSMC cut its own 2016 smartphone demand growth forecast to 7 percent from 8 percent previously.
“The smartphone growth is this year mostly from the medium and the low end,” TSMC co-Chief Executive Officer Mark Liu told investors on a conference call. “We see the over-$500 phone is reducing, but the $400 phone is increasing quickly.”
Liu’s comments gel with Gartner’s forecast for sales of basic smartphones to climb 10.6 percent in 2016, outpacing the market’s 7.2 percent rise.
“Growth of premium smartphones will stagnate at 2.1 percent,” Gartner’s senior research analyst, C.K. Lu, said in an e-mail.
This outlook should be concerning to Apple (AAPL) and Qualcomm (QCOM) investors as the two are TSM’s largest competitors, with 15 and 17% revenue exposure respectively. I suspect at this stage of the game this is not a massive surprise though as analysts have modeled a 14% year over year decline for AAPL’s eps and 39% sequentially, vs a 40% increase in eps last year same quarter and a 24% sequential decline last year same quarter. As for QCOM they are expected to report a 31% decline yoy decline in their March quarter, vs a 7% increase last year, and a 1% sequential decline vs a 4% increase last year same period. The main point here is that expectations are not particularly high for TSM’s two largest customers.
We have a short delta trade on in QCOM targeting its upcoming earnings, the April 22nd 53/43 put spread for $2. It’s currently a slight profit and we’ll check back in before earnings with some trade management.
For now we want to look at the sector at a whole with the SMH (semi conductor etf) as it’s at a critical technical level, butting against the downtrend line from its 2015 highs:
A failure here and we’re likely looking at a move back to the converging moving averages around 52. The catalyst for a breakout or failure at this point lays in the upcoming earnings schedule as some of the biggest components are set to report in the next few weeks on the heels of TSM’s report. INTC is 4/19, QCOM 4/20, and TXN 4/28:
Implied volatility in the SMH is low reflective of the steady march higher in its components since their February lows but probably not quite reflecting the potential inflection point in the index facing technical resistance going into earnings:
Therefore for those looking to play the sector directionally or those looking for some cheap portfolio protection, the options are both dollar and vol cheap. We’re not trading this just yet, and we are there somewhat with our QCOM trade but this will be something we may revisit before INTC reports on the 19th.
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