Mergers alone can't save chipmaking stocks

The Taiwan Semiconductor Manufacturing Co. headquarters in Hsinchu, Taiwan.
Maurice Tsai | Bloomberg | Getty Images

The iShares PHLX Semiconductor sector ETF is up 8.5 percent in October on the back of record-breaking industry consolidation.

But lost amidst the daily M&A headlines, two of the top three largest chipmakers in the world, Taiwan Semiconductor and Intel, gave pessimistic signals on the industry's fundamentals last week.

TSMC is largest independent foundry in the world and dominates the market for outsourced chip manufacturing with a customer list that includes Apple and Qualcomm.

The foundry cut its growth outlook for semiconductor industry sales for the third time this year to 0 to 3 percent. It cited a weaker global economy, stronger U.S. dollar and volatile financial markets as reasons semiconductor growth has slowed this year.

"We see the unexpected slowdown of the economy in China since the first quarter, resulting [in] continued sluggish smartphone demand in China. This led to our relatively flat revenue growth in the third quarter," Mark Liu, TSMC's co-chief executive officer, said on the third-quarter conference call, according to a FactSet transcript.

He added, "and we think the inventory level in the fabless industry would be still above seasonal normal by about 10 days at the end of the third quarter."

Intel also commented on poor demand.

"Relative to our forecast at the beginning of the year, we are seeing a weaker enterprise segment," Stacy Smith, Intel's chief financial officer, said on the third-quarter conference call, according to a FactSet transcript.

Qualitative comments on demand and business conditions are one thing, but the loudest signals TSMC and Intel can give is how much they invest in capital spending for their own chip factories.

And the news on that front isn't good....