What to expect in semiconductor stocks this earnings quarter

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A downward revision of Microchip’s current quarter forecast pushed down semiconductor stocks

On October 9, 2014, Microchip Technology Inc. (MCHP) announced that it expects its current-quarter revenue not to meet the company’s previous forecast or analyst projections. On October 10, 2014, leading players in the semiconductor industry like Intel (INTC) and Texas Instruments (TXN) fell 5% and 8%, respectively. Microchip Technology suffered a decline of 10%.

Microchip Technology’s announcement led to stock prices tumbling in the semiconductor space.

To learn in detail about the expectations from the tech sector in the previous quarter, see Must-know: What to expect from this week’s tech sector earnings.

share prices

Reasons that led Microchip Technology to revise its forecast downward

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Microchip Technology recognizes its revenues on a “sell through model.” Under this model, the company recognizes revenue only when distributors have sold products to customers, allowing the company to observe “true consumption” in the market. The chips that found usage in diversified areas—appliances, cars, phones, and office equipment—haven’t registered their normal pickup after the summer. Microchip Technology’s management indicated that the weak demand for chips in China could pass on to Europe and all of Asia.

Microchip Technology’s results are a barometer of the broader chip demand

As the chart above shows, major European chipmakers were also not spared from Microchip’s news. Infineon Technologies, STMicroelectronics (STM), and ASML Holding (ASML) all suffered a sharp decline in their stock prices after the announcement.

Microchip Technology is a highly diversified supplier of electronic components. About 80,000 customers use its digital and analog devices in finished products. Owing to its sales recognition method, the company indicates broader demand across the global semiconductor industry. The company claims that industry correction is on the anvil and most likely already started. So its news created quite a stir in the semiconductor space.

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