Broadcom (AVGO 263.47, -18.14, -6.4%) is leading chip stocks lower after missing second quarter revenue estimates and cutting its FY19 revenue outlook by 8% last night.
The company cited a broad-based slowdown in the demand environment, which they believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on Huawei.
On the call, CEO Hock Tan said that the US-China trade conflict is reducing visibility and demand.
Last quarter, he said that the softer outlook out of China was baked into guidance. He called for a bottom in the second quarter and a recovery in the second half of the year.
Last night, he said the second half would be in-line with the first half, calling for semiconductor revenue in the second half of the year down in the high single digit range yr/yr.
Broadcom lowered fiscal year semiconductor revenue to $17.5 bln from $19.5 bln. Huawei accounted for $900 mln in revenue last year, so the Huawei ban accounts for roughly half of the company's guidance cut.
Broadcom said softness began in May and accelerated after the US imposed its ban on Huawei.
As a result, chip stocks (SMH) -2.7% are taking it on the chin today: ON -5.1% STM -4.6% AMKR -4.3% AMD -4.0% CRUS -3.6% TXN -3.6% QRVO -3.5% ASML -3.3% INFN -3.2% WDC -3.1% UCTT -3.2% FORM -3.1% NVDA -3.1% MXIM -2.9% SWKS -2.9%.
Given their Chinese exposure, semiconductor equities have become somewhat of a proxy for the Sino-US trade war. Chinese companies likely stocked up on chips ahead of tariffs that went into effect this year. It seems demand was vulnerable to begin with and the Huawei ban may be the straw that broke the camel's back.
Semiconductor companies have sent mixed messages this year as some have called for a second half recovery while others remained more cautious. The second largest chip company backing off its bullish viewpoint doesn't bode well for the sector.
The Philadelphia Semiconductor Index has largely traded sideways for nearly two years. Analysts have been saying that the notorious boom and bust cyclicality of the industry has waned as demand for chips grows along with the digital revolution, but the broader macroeconomic cycle continues to grow long in the tooth.
It's not all bad for new for Broadcom, though. Second quarter free cash flow grew 20% to $2.5 bln, narrowly beating estimates, despite revenue growth of 10% missing estimates by more than 3%.
Broadcom's roll-up strategy has benefited from the diversification of the CA acquisition. The network infrastructure business was the only area of strength. Revenue guidance for that segment was maintained at $5 bln while the software business boosts margins. This was offset by softness at the Brocade business, which was also acquired.
Management said the company is well positioned to increase content in the newest smartphones (including Apple) with its latest RF and wireless chips. That said, expectations are pretty low for the upcoming iPhone cycle ahead an anticipated 5G compatible phone in September of next year.
Broadcom spoke to broad-based weakness in an extremely uncertain environment, which may represent a harbinger for the group. It seems like risk is to the downside for semiconductors as news flow is likely to get worse before it gets better this summer. Importantly, sentiment is subject to headline risk regarding US-China relations.