Silicon Wafers. Recovery Is Nigh Yet Valuations Have Slumped To 5 Year Lows. But Why?

You can buy SUMCO, Globalwafers & Siltronic today for the same price you would have paid 5 years ago...

The Silicon Wafer segment began to experience its version of the present downturn in Q123 when quarterly area shipments slumped by 11.25% YoY.

This was roughly six months after the Memory segment began its descent into its worst downturn in well over a decade. Protected by their rock solid Long Term Agreements, the Silicon Wafer manufacturers continued to ship wafers well above what their customers needed. Wafer inventories began to soar. We warned about this situation in this post back in May 2023:

Our conclusion in that note was as follows:

With 2023 demand at just 86% of supply, over capacity hasn’t been this bad in a decade. While inventory levels may have peaked in Q1’23, there’s still a long ways to go before demand will bring them down to more normal levels. In the case of Polished Wafers, don’t expect this to happen until H2’24.

We’re now well into H2’24 and, based on the latest earnings reports, that recovery is starting to happen, albeit slowly. Customer inventory levels are falling, and wafer area shipments are increasing. Yet, valuations for three of the key players, SUMCO, Globalwafers and Siltronic are all back roughly where they were five years ago.

In the case of SUMCO, the situation is even more dramatic in that its share price has fallen by ~45% since mid-July.

What’s going on here? As recovery looms, shouldn’t we be seeing greater investor interest, not less? Silicon wafers are the very foundation upon which the current generative AI boom is based and the key players stand to benefit nicely from the growth in AI servers in the coming years. Let’s dig in…