Semiconductor companies face inventory glut amidst AI boom

But optimism remains as sales are expected to grow in the second half.

The rise of artificial intelligence (AI) has created a divide in the semiconductor industry, with companies like NVIDIA benefiting from AI's popularity, whilst others struggle with a surplus of analog inventory due to slowing consumer demand for smartphones, laptops, gaming consoles, and electric vehicles.

Excluding AI beneficiaries like NVIDIA, falling revenues in this year's first quarter were experienced by semiconductor companies in the S&P 500 index.

Aside from this, inventories rose, negating the progress made in the previous quarters.

Companies in the S&P Semiconductors Index ended the first quarter with inventory worth $53.7b, according to S&P Global Market Intelligence data.

Despite a slight year-over-year increase in total inventory value, semiconductor companies ended the first quarter with $53.7b worth of inventory, doubling the levels seen at the end of 2019. This surplus of inventory has led to discussions about a necessary correction within the industry. 

In the face of an inventory glut, mentions of the word "correction" unsurprisingly reached the highest level in at least 29 quarters, according to Market Intelligence's Trending Topics.

Industry-wide challenges

"We are going through a pretty extraordinary inventory correction at this point," said Microchip CFO James Eric Bjornholt at a May 22 investor conference.

One such company feeling the impact of this inventory glut is Microchip, a provider of connected embedded control technologies. In the March quarter, the company experienced a significant decline in net sales, with analog and mixed-signal microcontroller sales taking a major hit. Analog semiconductors, which process real-world signals, have seen a sharp decline in sales across the industry, with companies like Texas Instruments and Analog Devices reporting drops in revenue due to weak demand in industrial electronics.

Whilst companies like Texas Instruments foresee a slowdown in declining sales in the coming quarters, others like Micron Technology, First Solar, and Qorvo have seen improvements in revenue growth due to various factors such as high demand for AI-related products and a recovery in end-user markets.

Despite the current challenges faced by semiconductor companies struggling with excess analog inventory, optimism remains as executives believe the worst may be over. 

Analog Devises CFO Richard Puccio expects industrial end markets to have bottomed and to "grow in the second half."

The company sees new opportunities as artificial intelligence spending moves beyond IT infrastructure into other areas like energy. 

CEO Vincent Roche said Analog Devices' vertical power technology can reduce power losses by 30% compared with traditional architectures, and it has seen interest from cloud service providers.

With the promise of growth in the second half of the year and new opportunities arising from AI transitioning into different industries, there is hope for a brighter future in the semiconductor industry.