Citi Explains The Warning That Has Tech Stocks Everywhere Tumbling

REUTERS/Kim Kyung-Hoon

On Thursday night, Microchip CEO Steve Sanghi sounded the alarm on the semiconductor industry, saying that an "industry correction" has begun and will sweep across the sector in the coming quarters.

Citi semiconductor analysts David Phipps and Ashish Nair explained in a brief paragraph in their latest note exactly what Sanghi is talking about.

They write:

"In semiconductor speak, an inventory correction occurs whenever demand drops off for a moderate period of time and can occur during economic expansion or contraction. Inventory corrections typically last 2-3 quarters with a step-down in demand and reduced visibility. The economic impacts are lower sales and margins. Semiconductor company marginal revenue dollar has about a 50% translation into EBITDA."

In the same note Phipps and Nair cut their forecasts on Freescale and NXP Semiconductors (they don't cover Microchip).

So, that's what going on in the world of semiconductors on Friday and what analysts expect will happen over the coming months.

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