Forecasts for the World
of Chips
By Tish Williams
Senior Writer
5/26/00 5:03 PM ET
In a year and a half, the pain begins.
Or two years, depending upon whose estimates of
the chip cycle you believe. Thursday night, three top
chip analysts came together to divine the future of
the industry during the Churchill Club's fifth-annual
Semiconductor Forecast in Palo Alto, Calif. The
analysts picked their favorite stocks and the ones
they would short, and explained big, new forces
behind semiconductor industry growth.
Dan Niles brushed off his departure this week from
Robertson Stephens (he's now heading up the chip
and PC areas at Lehman Brothers) and dived into
the predictions.
By Niles' estimates, we're one and a half years into
the chip cycle, with two or three to go. "Hence my
job change," he joked. Don't begin the celebrations
yet, however: Niles and his colleagues agree that it's
going to be a cruel summer. "The next four to five
months are going to be very choppy," he says.
Morgan Stanley's Mark Edelstone agreed that until
August, chip investors should sit tight. Yet, he cut
short Niles' estimates for a 24-to-36-month chip
heyday. "I'm not sure it lasts as long as Dan said,"
Edelstone said. "It started at the end of '98 and will
go until the end of 2001, or early 2002." Edelstone
thinks we're enjoying the most prosperous, though
fleeting, moments of the cycle, with more than 90%
of chip companies beating quarterly estimates. But
he still believes "we'll get close to $30 billion in
revenues a month before the cycle is over, and we're
only at $15 billion now."
Which leads us to self-styled doomsayer Drew Peck
of SG Cowen. Peck isn't so sure the rest of the
cycle will benefit investors because "it's tough to find
an investor who doesn't know that. It's difficult to
surprise anyone."
In other words, even with the Philadelphia
Semiconductor Index's nearly 35% decline since
early March, Peck says, "I wouldn't rush out and
buy. That 30% growth rate is already factored in."
Fine, ruin the joyous mood. Go ahead!
Peck adds that he thinks chips sales are really
growing at 25% rates; the 30% annual
revenue-growth figures come from the esteemed
Semiconductor Industry Association. He
attributes the 5% difference to inventory building.
And that inventory build, fair reader, is what these
three chip diviners think will bring an end to the
skyward trajectory of the chip cycle.
Clutch those Kleenexes tightly. Niles explains that
the current chip cycle likely will be felled by an
experience similar to the one at the end of '95, when
chip companies forecast banner shipments for PCs,
bolstered by Windows 95 demand, but the demand
never came. Chip companies were stuck with too
many chips, had to lower prices and, wham-o,
welcomed back the dirty downturn.
Niles thinks this time chip companies will probably
get sucked into the continuing excitement over all
the new consumer and mobile devices that need
flash memory and digital signal processors (DSPs).
"Say it's Q1 2002, and the data-capable phones
didn't sell. People didn't really want to surf on a
screen this size. That's how these things happen,"
says Niles, explaining one of the main risks for the
chip sector.
So what can you do to save yourself? You've heard
about component shortages and PC market
sluggishness (the first true, the latter false,
according to the panelists). You thought at least the
continuing chip-market climb would give you some
optimism.
Pessimist Peck has a tip just for you: Divide stocks
into companies fueled by the economy, and those
fueled by technology, and shy away from those tied
too closely to the economy during periods of
economic uncertainty. He considers the PC industry
an economy-driven business.
Technologies he likes are mixed-signal components
(i.e. DSPs), wave-division multiplexing (WDM) for
packing more information onto fiber-optic cables,
high-speed switching, and Fibre Channel, a
high-speed storage networking technology. Not
Intel's (INTC:Nasdaq - news - boards) biggest fan,
Peck says the chip granddaddy is too bound by
economics, as is Analog Devices (ADI:NYSE -
news - boards), despite a 400% gain last year. His
pick: SDL (SDLI:Nasdaq - news - boards), which
makes pump lasers for wave-division multiplexing.
"The economy's impact on SDL is very low.
Expectations are still not high enough for SDL; they
can surprise on the upside." SG Cowen did
underwriting for SDL in 1995 and 1996.
Niles, on the other hand, likes Intel, along with
Atmel (ATML:Nasdaq - news - boards), LSI Logic
(LSI:NYSE - news - boards), National
Semiconductor (NSM:NYSE - news - boards) and
Microchip Technology (MCHP:Nasdaq - news -
boards), because their revenue growth is
accelerating.
He also taps companies that are either
"inexpensive" or are at an attractive point in their
product cycles: Cypress Semiconductor
(CY:NYSE - news - boards), Lattice
Semiconductor (LSCC:Nasdaq - news - boards),
Nvidia (NVDA:Nasdaq - news - boards) and Xilinx
(XLNX:Nasdaq - news - boards). Niles' intentions are
innocent; Lehman doesn't cover any of these
companies, nor has it done banking business with
them.
Now, for the analyst picks. Each year, panel
moderator and ex-chipper Tom Lai of Institutional
Venture Partners asks the group to pick a short
and long favorite. Over the last year, Peck won the
longs by pinning his hopes on Cypress
Semiconductor. This year, Peck went outside the
cozy semiconductor world and chose Crossroads
(CRDS:Nasdaq - news - boards), because he thinks
that, although it's gotten "crushed" lately, there is a
market for Crossroads' routers used in storage-area
networks. (SG Cowen did underwriting on
Crossroads' IPO.) He went double or nothing on his
monstrously bad short pick of last year, Gateway
(GTW:NYSE - news - boards). "It's an accident
waiting to happen," he says with childlike glee.
Edelstone swooped up National Semiconductor as
his long pick, calling it "cheap," compared with its
competitors, and concluding that it was settling
down after many disruptive strategic moves.
Edelstone has a strong buy on National
Semiconductor, and his firm has no banking ties to
the chipmaker. Edelstone wouldn't pony up a short,
prompting a little ribbing from emcee Lai. "That tells
you the investment advice you get out of Morgan!"
Finally, Niles graced unlikely Micron (MU:NYSE -
news - boards) with his long affections, and
squashed NETsilicon (NSIL:Nasdaq - news -
boards) with a damning short. After a little prodding,
Niles confesses, "One of its big customers is about
to become a big competitor."
Take heart, NetSilicon: Niles lost for the first time
this year because he picked AT&T (T:NYSE - news
- boards) to go up. Analysts are only human, it's
their predictions that are divine.
thestreet.com
***************
So three analysts are professed experts and can't even agree on the semi cycle. One will be right, the other two foolish.
Jack |
