After rallying yesterday following a report that Taiwan Semiconductor (TSM) - Get Report plans to build a major fab in Arizona, chip stocks have reversed course today following news of new Huawei restrictions and TSMC’s sharing of details about its fab-building plans.
The Philadelphia Semiconductor Index is down 2.7% as of the time of this article, nearly erasing Thursday’s 2.8% gain. As of Thursday’s close, the index was up more than 40% from its March 23 low.
Contributing heavily to the selloff: The Commerce Department placed new sanctions on Huawei that are likely to cause major headaches for the Chinese tech giant’s HiSilicon chip unit. Specifically, the rules aim to prevent Huawei and its affiliates from using American “software and technology” subject to export controls to help design chips, and from having its chips produced using American chip manufacturing equipment that’s subject to export controls and located outside of the U.S..
In practice, the rules are likely to prevent HiSilicon, whose chips now go into everything from smartphones to servers to surveillance cameras, from purchasing electronic design automation (EDA) software from firms such as Cadence Design Systems (CDNS) - Get Report and Synopsys (SNPS) - Get Report. And they also stand to prevent HiSilicon from having its chips produced by contract manufacturers (foundries) such as TSMC, which HiSilicon currently relies heavily on.
The rules come on top of new DOC export restrictions (announced on April 28) that could impact U.S. exports of chip manufacturing and test/inspection equipment to China, as well as the export of some high-performance chips.
They also follow the sweeping restrictions that were placed last year on the ability of U.S. companies to do business with Huawei and Chinese peer ZTE. Earlier this week, the Trump Administration extended those restrictions to May 2021.
On Friday morning, China’s Global Times reported (citing a source) that Beijing is prepping countermeasures in response to Washington’s actions against Huawei. These countermeasures are said to include “imposing restrictions on or launching investigations into US companies like Qualcomm, Cisco and Apple.”
Qualcomm (QCOM) - Get Report is down more than 5% in Friday trading. Some other chip suppliers with strong smartphone exposure, such as STMicroelectronics (STM) - Get Report and Qorvo (QRVO) - Get Report, are also down strongly, as are chip/component suppliers with strong telecom equipment exposure, such as Lumentum (LITE) - Get Report and II-VI (iiVI) .
Chip equipment stocks, which rallied sharply on Thursday, are also down strongly today. In addition to the Huawei news, investor disappointment over the planned size of the Arizona fab that TSMC plans to build appears to be weighing on equipment makers.
On Thursday evening, TSMC said that its Arizona fab is slated to begin construction in 2021 and start making chips in 2024, and will have a production capacity of 20,000 chip wafers per month. For comparison, research firm IC Insights has estimated that TSMC’s global production capacity stood at 2.5 million wafers per month as of last December on a 200mm-equivalent basis. Even if one assumes that the Arizona fab will make chips using wafers with a 300mm diameter -- their surface area is 125% larger than that of 200mm wafers -- TSMC’s comments suggest that the fab will only account for a small portion of its global capacity.
TSMC also said that it plans to spend about $12 billion on the Arizona project from 2021 to 2029, while indicating that this number covers both capital expenditures as well as other expenses. For comparison, TSMC spent $14.9 billion on capex in 2019 alone, and has set a 2020 capex budget of $15 billion to $16 billion.
Equipment makers Lam Research (LRCX) - Get Report and Teradyne (TER) - Get Report are down more than 5% in Friday trading, while ASML (ASML) - Get Report and KLA (KLAC) - Get Report are down more than 3%. Applied Materials (AMAT) - Get Report is also down more than 5%, in spite of having shared upbeat comments about near-term demand on its Thursday afternoon earnings call.
Though it missed April quarter estimates due to the impact that shelter-in-place orders had on its Bay Area operations, Applied said that its chip equipment orders were “up significantly” during the quarter, and said that it thinks its chip equipment revenue (65% of April quarter revenue) could be up by a high-single digit percentage sequentially.
Applied added that chip equipment revenue could also see sequential growth during its October quarter, which in turn would lead it to record strong double-digit growth for the whole of fiscal 2020 (ends in October).
Like many other equipment makers, Applied has been benefiting from strong capital spending by TSMC and Intel, as well as a recent pickup in demand from memory makers following major 2019 memory capex cuts. Its earnings call commentary led its shares to rise more than 4% in after-hours trading, which ended before TSMC detailed its Arizona fab plans.