PSA Tech Strategy – Is This the Peak for Capital Good Stocks?

Tech Strategy – Is This the Peak for Capital Good Stocks?
In the past week, three major sell-side reports have come out suggesting we are at the peak of the memory cycle. While such uniformity is not unusual among sell-side analysts, it is more usual to see this once a trend has developed, as opposed to now, where the analysts are calling an inflection point. The unusual nature of the current situation is worth dwelling on from both a theoretical viewpoint and a practical one.

Key Points

• There’s a good case to be made that the recent weakness in NAND prices is only a start, as, by extension, is the recent weakness in semiconductor / SPE names.
• Semiconductors face short-term supply side-led price weakness, brought about by: new fab / line construction; EUV upping the number of die per wafer; and improved yield in 3D NAND.
• A similar argument can be made for automation equipment, although the absence of market pricing will limit dissemination of news here.
• However, while it looks like a downturn is overdue, we are in the middle of an economic upswing, and so we do not expect a demand-side shortfall for now.
• Supply-side downturns, especially in semiconductors, play out very differently from demand-side downturns. While the latter can get caught in a vicious circle, the former usually result in a new clearing level. In those circumstances, we can expect a subsequent “swansong” rally.
• Given PSA’s expectations that the Japanese economy’s “Goldilocks” period should end with the economy overshooting on the upside sometime around next summer, a swansong seems quite plausible. Those interested in Elliott Wave Theory might recognize this swansong rally as a “Fifth Wave”.
• The near-term outlook and valuations do, in our view, mean it makes sense to downplay the capital goods parts of the semiconductor and automation cycles.
• We suggest switching to the materials / parts chain names that should benefit from (a) increased production capacity from all the capital spend and (b) the increase in demand resulting from end-product price weakness. However, our preference is for tech OEMs, be they consumer-orientated – Sony (6758), Panasonic (6752) – or else enterprise- orientated – Hitachi (6501), Fujitsu (6702), NEC (6701), Mitsubishi Electric (6503).