Microchip Falls on China Demand; Chip Stocks Tumble

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Microchip Technology Inc. tumbled the most in almost 6 years and shares of rival chipmakers fell after the company said product orders missed its forecast, hurt by falling demand in China.

Microchip’s announcement triggered a sell-off in semiconductor stocks today, with the Philadelphia Semiconductor Index undergoing its worst one-day decline since 2009. Microchip fell 12 percent to $39.96 at the close in New York. Peers such as Freescale Semiconductor Ltd. also dropped more than 10 percent.

Microchip makes semiconductors used in products ranging from home appliances to computer network hardware to cars, so its earnings are a broad indicator of industry demand. China is the largest market for key products such as smartphones, with factories located there responsible for much of the world’s electronics production.

“The revenue miss was led by China where the September quarter is traditionally the strongest,” Microchip Chief Executive Officer Steve Sanghi said in a statement yesterday. “Microchip often sees the turn of the industry ahead of others in the semiconductor industry. We believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future.”

Industry Cycle

The report raises concern that chipmakers may have built stockpiles of parts that they will now struggle to sell. Microchip recognizes sales only when distributors of its products sell them to device makers. If, like some of its peers, it booked revenue when chips are sold to distributors, its sales would have appeared larger, Sanghi said in the statement.

Preliminary revenue for the second quarter is about $546.2 million, including $16.9 million from the company’s recent ISSC Technology Inc. acquisition, Microchip said yesterday. In July, the company had forecast $560 million to $575.9 million in revenue. Analysts had projected $568.2 million, according to data compiled by Bloomberg.

The Chandler, Arizona-based company has historically been an early semiconductor cycle indicator, investment research firm Hedgeye Risk Management, wrote in note to investors today.

“Semiconductor downcycles affect all chip firms. Nobody will be spared,” Hedgeye said.

Texas Instruments Inc., the largest maker of analog chips, fell 7.1 percent, while Micron Technology Inc. dropped 9.3 percent.

U.S. technology companies will begin reporting their third-quarter performance next week. Intel Corp., the world’s largest chipmaker, will announce results on Oct. 14.