Key Takeaways
- 5G smartphone models are rolling out, which we expect to drive 7% unit growth in 2021, up from a decline of 10% in 2020.
- Enterprises are still keeping a lid on spending, but we expect them to release pent-up demand in 2021, resulting in global information technology (IT) spending growth of 3.5%.
- The cyclical auto and industrial end markets are recovering, a good leading indicator for the rest of the semiconductor market.
- Memory markets are diverging on supply discipline, with DRAM likely to recover in the first quarter of 2021, while NAND will remain weak at least through the first half.
- Companies are using stock for mergers, keeping balance sheets in good health.
5G Leads The Way
New 5G handset models from Apple Inc. and Samsung Electronics Co. Ltd. are rolling out, which, along with devices from other providers, we expect to drive 7% unit growth in 2021, supported by reports of long lead times. This is up from a 10% decline that we expect for 2020 because of pandemic-related supply chain disruptions, retail store closures, and a demand shock resulting in an elongated refresh cycle. This is even better news for suppliers of smartphone components, because 5G phones carry much more content, so we would expect revenue growth in the mobile segments of these suppliers to substantially exceed smartphone unit growth. It also sets the stage for increasing investments in networks where Asian countries (e.g., South Korea, China, and Japan) currently lead. We expect North America and Europe to ramp up their deployments in 2021 and for those investments to persist for years because of the utilization of shorter waves, which require more network connection points. Over the next decade, we expect enterprise and industrial use cases such as factory automation, remote patient monitoring, and renewable energy connectivity to support 5G demand and the necessary network investment.
Enterprises Have Constrained Their Spending, But They'll Likely Release Pent-Up Demand In 2021
Enterprises have remained cautious in their spending throughout the pandemic, rotating spending on on-premises servers and storage to notebook, collaboration, and cloud adoption to support working from home. Results from Intel Corp., Cisco Systems Inc., and Dell Inc. support this view. We expect more clarity on 2021 spending priorities when IT budgets are set early next year, but good news on vaccines should give companies the confidence to release pent-up demand and address deferred projects, supporting our forecast for global IT spending growth of 3.5% in 2021. Some of the trends from 2020 should reverse: There will be some reversion in PC demand as we expect units to contract 7% after growing 2%, external storage revenue should bounce back to 5% after being down 7%, and networking equipment revenue should grow 2% after declining 5%.
Cyclical End Markets Are Recovering
Analog Devices Inc. and NXP Semiconductors N.V. reported good results, showing that auto and industrial end markets are starting to recover. After hitting a hard bottom in second-quarter 2020, the auto end market bounced back in the third quarter. The rebound was led by China, the first country affected by the coronavirus and that which has implemented an effective response that allowed industrial production as a whole to rebound; North America is now following. Auto also benefits from increasing content due to electrification, advanced safety, and infotainment. Factory automation is driving a rebound in the industrial market, which should continue for several years as 5G deployments unlock new use cases.
Memory Markets Are Diverging
Last quarter, we expected both DRAM and NAND to be weak in the second half of 2020 on enterprise spending caution and as hyperscalers digest prior investments. We also expected both would rebound as these trends reverse in the first half of 2021 and as 5G handsets and new gaming consoles roll out, adding to demand. That view holds for DRAM, but we expect NAND to remain weak through at least the first half of 2021 because of divergence in planned capacity additions, with DRAM's supply remaining tight and NAND's capacity expanding. We think the DRAM market has more supply discipline because only three players make up the bulk of the market, while there are six large players in the flash market. Flash could benefit from some consolidation, and Intel's agreement to sell its business to SK Hynix Inc. is a step in the right direction.
Companies Are Using Stock For Mergers And Acquisitions (M&A)
M&A activity has quickly recovered after the initial COVID-19 outbreaks in the U.S., particularly in semiconductors. This activity has been characterized by high target prices and high equity prices of acquirers, which we believe has given them comfort to use their stock--a credit-friendly funding source--as consideration. Examples of deals that included significant stock are Analog Devices/ Maxim Integrated Products Inc., NVIDIA Corp./Arm Ltd., and Advanced Micro Devices Inc./Xilinx Inc.Salesforce.com Inc.'s acquisition of Slack will include somewhat less stock, but it will include balance sheet cash that will moderate the issuance of new debt, and we expect healthy cash flow to replenish the balance sheet.
Low-End Speculative-Grade Credit Is Improving
During the weeks following the initial COVID-19 outbreaks in the U.S., we took negative rating actions on several highly leveraged financial-sponsor owned companies in the 'B' and 'CCC' categories. Generally, these companies have held up better than expected, and we have reversed a few of these actions after third-quarter earnings were released. We expect to reverse several more of these actions if fourth-quarter earnings and 2021 forecasts play out as we expect.
This report does not constitute a rating action.
| Primary Credit Analyst: | Christian Frank, San Francisco + 1 (415) 371 5069; christian.frank@spglobal.com |
| Secondary Contacts: | David T Tsui, CFA, CPA, San Francisco + 1 415-371-5063; david.tsui@spglobal.com |
| Andrew Chang, San Francisco + 1 (415) 371 5043; andrew.chang@spglobal.com |
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