Investor's Business Daily
Quandary For Semiconductor Industry: Enjoy Today Or Worry About Tomorrow?
Wednesday June 2, 6:46 pm ET
James Detar
A new, impending chip slowdown is now official.
It might seem like chip sales had just started to rebound after the dot-bomb of 2001-02, but analysts have been saying the latest semiconductor cycle was peaking. This week, the industry's leading research group made it official.
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The World Semiconductor Trade Statistics group said it expects chip sales to rise 28% this year to a record $213 billion. That would beat the 2000 bubble year by about $9 billion. That's the good news.
The bad news? WSTS says sales will start to slow in the second half of this year, and will rise a mere 8.5% in 2005. Already this week analysts have downgraded some chip gear stocks.
"But there are still some innings to be played" in this up cycle, said WSTS Americas representative Ken Davis, who's also an economist for Motorola's (NYSE:MOT - News) Freescale Semiconductor unit.
Still, chipmakers once again will have to start curbing their spending to match slowing sales growth, which would hurt chip equipment makers.
Gartner Forecasts 25% Rise
"One would look at that (chip slowdown) and say there are some capital projects on the drawing board that may not see full completion," Davis said.
WSTS, an independent researcher, compiles data for the chip field's largest trade group, the Semiconductor Industry Association.
Research firm Gartner on Wednesday said it expects chip sales to grow 25% this year and 15% in 2005.
Speaking as a spokesman for WSTS, Davis says 28% chip sales growth this year — the second largest percentage rise in recent years to the 37% gain in 2000 — means chip sales will slow from a blistering 34% gain year to date vs. the same period in 2003.
And the SIA says April sales rose a stunning 37% vs. April 2003, the biggest such percentage gain since July 2000.
"It's not a stretch to go to 28% growth for the year," Davis said. "It simply argues the pace of the first half will not be maintained in the second half of this year. You will see a slowdown as we go into the back half of 2004."
WSTS sees flat chip sales in 2006, with a new growth cycle starting late that year.
Citigroup Smith Barney analyst Timothy Arcuri, in a Wednesday report, says chip factories already have reached peak capacity for this cycle. That means chipmakers won't be needing a lot of new chipmaking gear.
Applied Materials Downgraded
"Therefore, most equipment stocks have likely peaked for the cycle on an absolute basis," Arcuri wrote. He says the full impact likely won't hit gear stocks until next year.
On Wednesday, he downgraded some of the largest chip gear makers, including No. 1 Applied Materials (NasdaqNM:AMAT - News). He also downgraded gear makers KLA Tencor (NasdaqNM:KLAC - News) and Novellus (NasdaqNM:NVLS - News).
Applied on Wednesday closed 26% off its 12-month high, at 19.09. KLA closed 26% off its 12-month high, at 46.08.
Rather than worry about tomorrow, gear makers would rather celebrate today, says Stanley Myers, head of the Semiconductor Equipment & Materials International trade group.
"Our member consensus forecast — which some consider conservative — is 39% growth to in excess of $39 billion in sales this year," Myers said.
He says SEMI maintains its 2005 forecast of 18% growth. "Orders have been increasing since last July," Myers said. "We think that will last the rest of this year."
SEMI might well be conservative. Chip gear sales will rise 53% this year, says Brian Matas, an analyst with IC Insights in Scottsdale, Ariz. For 2005, he sees only 9% growth.
"We can expect to see the slump start impacting (sales) as early as the fourth quarter, but for sure in the first quarter," Matas said.
The chip gear spending outlook might come into better focus on Thursday, when No. 1 chipmaker Intel (NasdaqNM:INTC - News) is slated to give its midquarter update.
Some call Intel a contrarian capital spender. It spends a lot on plants and gear when chip sales slump, and eases up during fast growth periods. The idea is to put capacity in place early and not have to scramble when a boom hits. So it might boost its spending, unlike other chipmakers.
Intel recently said it plans $3.8 billion in capital spending this year, up from $3.7 billion in 2003. In 2001, a terrible year for the chip industry, it spent a company-record $7.3 billion. |
