The risks for the sector seen from the Semiconductor Index
On Friday, March 10, the Federal Deposit Insurance Corp. (federal deposit insurance agency) announced that the California authorities have closed the Silicon Valley Bank (SIVB), an institution with about 209 billion dollars in assets and 175.4 billion in deposits (at the end of 2022 it was ranked 14th US bank by total assets in billions of US dollars, by Statista.com) and they take control of it, effectively decreeing its bankruptcy. The clientele consisted mainly of Californian technology companies financed by venture capital (mainly therefore start-ups).
A failure of such proportions has not been seen since 2008 (subprime mortgage crisis). The FDIC will arrange to sell the bankrupt bank’s assets; it promised to repay insured depositors up to $250,000 by Monday 13/March, while receivership certificates will be provided to uninsured depositors (they may also receive an early dividend in the coming days). Treasury Secretary Janet Yellen told the House Ways and Means Committee that the situation is being carefully.
The causes of the failure of Silicon Valley Bank
According to The New York Times, the failure of Silicon Valley Bank was caused by a bank run after the company announced a loss of about 1.8 billion dollars and consequently a capital increase. The loss had been caused by the bank’s management choice to sell $21 billion worth of bonds at a loss of $1.8 billion because, it seems, many of those bonds averaged only 1.79% yield in a time of drastic rate hikes and didn’t want to run into a downgrade of Moody’s.
Until then the bank was not insolvent, but investors and depositors reacted to the news with a run on branches (and online bank transfers) withdrawing as much as 42 billion in the morning of 9 March alone, causing a ripple effect, which led the bank to have a negative cash balance of approximately $958 million as of the March 9 close. Based on the current information in circulation, it seems that the collapse could have been avoided: a poor choice of communication to customers and the public has created a lack of trust and the rush to divest from SVB.
The impact on the technology sector
In the last few hours, the Bank of England has decided to close the British branch of the Silicon Valley Bank stating that “… it has no critical position in the country’s financial system”. There is certainly concern though possible setbacks to the “young” part of the technology sector international. Let’s take a cue from this series of news to take a look at the Philadelphia Semiconductor Index (SOX), a stock index considered the benchmark of the semiconductor sector.
Created in 1993 by the Philadelphia Stock Exchange, it is composed of the 30 largest US companies mainly involved in the design, distribution, production and sale of semiconductors (Semiconductors are crucial components in electronic devices, fundamental for making any electronic component and especially chips and microchips needed to operate smartphones, tablets, PCs, smart TVs, consoles, car systems…). Among the companies that compose it are: Advanced Micro Devices, Applied Materials, Broadcom, Intel, KLA corp., Micron Tehnology, NVIDIA, ON, Qualcomm, Taiwan Semiconductor Manufacturing Co., Teradyne, Texas Instruments…).
The turnover of the big names
In 2022, Intel generated revenue of $58.4 billion and Samsung of $65.6 billion, positioning them among the largest companies in the industry. In 2022, global semiconductor sales reached US$580.13 billion, and the year-over-year growth rate in 2022 reached 4.4%. Semiconductors are crucial components in electronic devices, essential for making any electronic component and above all chips and microchips necessary to operate smartphones, tablets, PCs, smart TVs, consoles, car systems…
2022 for the SOX index had started well, with new highs at 4068 for this index, then dropped by almost -50% (but some individual stocks dropped more) until it reached 2090pt in October/2022, to then recover , going up to 3168pt in February, closing on Friday at 2923pt. The analysis highlights a future fluctuation that will be accompanied from stalemate phases alternating with high volatility movements that will tend to retrace most of the movement of 2022, with declines to 2650 and 2200/2000 which are within the norm, as well as climbs to 3100/3150pt. Note how the resistance at 3180pts held back the rise in February and should therefore be monitored (overcoming this level would allow the index to progress towards 4000/420pts). Support: 1900pt area.
What is a semiconductor
A semiconductor is a substance that conducts electricity under some but not all circumstances. Manufacturers are able to customize the conductivity of a semiconductor, for example by introducing a sensitivity to heat or to light or by altering the conductivity based on the direction of the current. Semiconductors are an important component of many commonly used electronic devices including smartphones, tablets and PCs.
Smartphones are expected to dominate a major portion of the semiconductor market going forward, especially as these devices become more advanced and capable of supporting technologies such as augmented reality (AR), virtual reality (VR), 5G and artificial intelligence (AI). Semiconductors for use in servers and data centers are set to become an even more important opportunity, with semiconductor innovation needed to support cloud data centers and the rise of edge computing.
The case of Sia
The Semiconductor Industry Association (SIA) on March 3, 2023 announced that global sales of the semiconductor industry amounted to $41.3 billion in January 2023, down 5.2% from the December 2022 total of $43.6 billion and 18.5% down from the January 2022 total of $50.7 billion.
According to the World Semiconductor Trade Industry (www.wsts.org) in 2023 the global semiconductor market is expected to decrease by 4.1% to 557 billion dollars, driven by the memory segment. In the latter prediction, this category expected to fall to $112 billion in 2023, with a decrease of 17% compared to the previous year. Other major categories show single-digit growth such as Optoelectronics, Sensors, Discrete and Analog. All regions are projected to remain flat in 2023, with only Asia Pacific expected to decline 7.5% year-on-year.
John Neuffer, president and CEO of Sia, said: “Despite record sales in 2022, the global semiconductor market has noticeably cooled during the second half of the year and that trend has continued through the first month of 2023.” Adding, “Despite the current short-term cyclical downturn, the long-term outlook for the semiconductor market remains robust due to the ever-growing role of chips in powering today’s and tomorrow’s critical technologies.”
At the regional level, monthly sales increased slightly in January in Europe (0.6%), but decreased in Japan (-2.1%), Asia Pacific/all others (-2.7%), Americas (-7.9%) and China (-8, 0%). Year-over-year sales increased in Europe (0.9%) and Japan (0.7%), but decreased in the Americas (-12.4%), Asia Pacific/All Others (-19.5%) and in China (-31.6%).
This article has been prepared for informational purposes only, it does not constitute advice or a solicitation to buy or sell financial instruments. The information reported is in the public domain, but may be subject to change at any time after publication. We therefore decline all responsibility and remind you that any financial transaction is carried out at your own risk.