In the semiconductor industry, there is a growing divide between those benefiting from the AI craze and those swimming in excess analog inventory.
While spending on artificial intelligence has propelled NVIDIA Corp. to historic heights, much of the rest of the semiconductor industry remains trapped in a cyclical inventory glut created by the post-pandemic slowdown in consumer demand for things like smartphones, laptops, gaming consoles and even electric vehicles. Excluding artificial intelligence beneficiaries such as NVIDIA, semiconductor companies in the S&P 500 index experienced falling revenues in the year's first quarter. At the same time, inventories rose, erasing the progress made in previous quarters.
All told, companies in the S&P Semiconductors Index ended the first quarter with inventory worth $53.7 billion, according to S&P Global Market Intelligence data. While this is up only slightly year over year from $53.0 billion, it is up significantly on a historical level — about twice the level reported at the end of 2019.
Given the inventory glut, mentions of the word "correction" unsurprisingly reached the highest level in at least 29 quarters, according to Market Intelligence's Trending Topics.
"We are going through a pretty extraordinary inventory correction at this point in time," Microchip CFO James Eric Bjornholt said at a May 22 investor conference.
Microchip, a semiconductor supplier of connected embedded control technologies, recorded a 24.9% sequential drop in net sales in the March quarter. Year over year, net sales were down 40.6%.
The company saw significant declines in analog and mixed-signal microcontroller net sales. Analog semiconductors process real-world signals like temperatures and touchscreens, while digital semiconductors process binary information, or information used by computers. Mixed-signal microcontrollers have both analog and digital circuits.
Microchip's analog net sales fell to $329.2 million in the March quarter, down from $617.9 million a year earlier.
The company is not alone. Across the industry, analog semiconductors are struggling with high inventories and lower sales. Texas Instruments Inc. and Analog Devices Inc. similarly saw year-over-year and sequential drops in revenue, largely due to weak end markets in industrial electronics.
Texas Instruments head of investor relations Dave Pahl said on the company's latest earnings call that consumer end markets have been coming out of correction territory in recent quarters, but the industrial end market continued to deteriorate.
"We've got some of the later-cycle sectors that are continuing to decline and declining at double-digit rates," Pahl said, adding he expects declines to slow in the coming quarters. Adding to the pain, Texas Instruments has been targeted by activist investor Elliott Management, which is pushing the company to prioritize free cash flow generation over capital expenditures.
Still, executives believe the worst may be behind them. Analog Devices CFO Richard Puccio expects industrial end markets to have bottomed and to "grow in the second half." Analog Devices sees new opportunities as artificial intelligence spending moves beyond IT infrastructure into other areas like energy. CEO Vincent Roche said Analog Devices' vertical power technology can reduce power losses by 30% compared with traditional architectures, and it has seen interest from cloud service providers.
Meanwhile, AI continues to drive sales for NVIDIA and others. Micron Technology Inc., First Solar Inc. and Qorvo Inc. saw notable improvements in year-over-year revenue growth. Micron has benefited from strong demand for AI-related high bandwidth memory products, while First Solar benefited from energy transition demand. Qorvo, which specializes in the connectivity and power markets, experienced a recovery in its end-user markets after an abrupt decline.