Here is a fairly optimistic view of semi's and AUGT:
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Semiconductor IPOs Survive Sector Crash
Friday, July 7, 2000
Dan McCarthy
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Semiconductor stocks dropped sharply earlier this week on the release of a
negative report on the industry from Salomon Smith Barney, leading to
concerns within the IPO market that yet another new issue sector was headed
for the doldrums.
In the wake of the mid-April Nasdaq correction, only a few select sectors, such
as broadband, wireless, and semiconductors, have managed to keep some
strength in the IPO market.
Now, with a single-day decline on Wednesday of more than 9% on the
Philadelphia Stock Exchange Semiconductor Index , it appeared that
semiconductors, too, might be in for a summer malaise. But if the aftermarket
performance of recent IPOs is any indication, some new semiconductor issues
may well walk away from Wednesday's crash unscathed.
Brightest Stars
Semiconductors had been one of the brightest areas of the market in late 1999
and early 2000. The Philadelphia index climbed in less than a year from 400 to
its all-time high of 1362.10 in March. Since then, it has followed the Nasdaq by
bouncing along with a great deal of volatility and more overall progress down
than up.
But Wednesday's steep decline had nothing to do with the Nasdaq as a whole.
The blame can be firmly affixed to Jonathan Joseph and his team of analysts at
Salomon. Although he downgraded only four of the many semiconductor
stocks that Salomon tracks, he put in a word of warning for the sector as a
whole.
Pointing out that semiconductors are a cyclical market in which high demand
and rising prices lead to oversupply and weak stock performance, he said that
current conditions in the market indicate that a peak is at hand. That can only
mean, according to Joseph, bad things for semiconductor stock prices:
"Going back nearly 40 years, semiconductor stock performance has shown
one major trend in peak years: the group has underperformed the DJIA and the
S&P 500 during the year," Joseph and his team said in the report.
Convincing Analysis
Investors apparently found Joseph's analysis convincing, because they
significantly pushed down the price of all 16 of the components of the
Philadelphia index. Only Motorola (ticker: MOT) weathered the storm well,
losing 50 cents, but it had already lost almost half of its early-March valuation.
With a drop like this, one might easily expect recent semiconductor IPOs,
none of which is a component of the Philadelphia index, to follow suit. Indeed,
some of them did experience a sizeable drop. The German firm Dialog
Semiconductor (ticker: DLGS), which only started American trading on June
29, lost 3 7/8, or 7%, to finish at 51. MKS Instruments (ticker: MKSI) a March
1999 IPO, lost 13.5% on the day to fall from 39 to 33 ¾.
Isolated Losses
On the whole, however, these losses were isolated. Many recent
semiconductor issues dropped only a little, if at all. August Technology (ticker:
AUGT) for example, fell only ¼ to close at 15 ¾; The company produces
devices that find defects in semiconductors. Nova Measuring Instruments
(ticker: NVMI), which makes integrated process control systems for the
manufacture of semiconductors, closed at 15 5/8, for a loss of just 1/8.
One explanation for this disparity in performance is that recent semiconductor
IPOs are in fact a different kind of company from those tracked on the
Philadelphia Semiconductor Index. Most of the Philadelphia companies are
well established, with market capitalizations well above $5 billion. By
comparison, MKS, August and Nova all remain below $1 billion in market cap.
Furthermore, while many recent IPOs fall in the semiconductor sector, only a
few are actually engaged in the manufacture of microchips themselves. Most of
them are in related businesses, like the aforementioned August and Nova.
These companies may produce items that are used to produce
semiconductors, or they may make use of already-produced chips, but for the
most part, they leave the main production to giants like Intel and Motorola.
This might not seem like much of a distinction at first; after all, if one business
falters, then certainly related businesses should suffer as well. A maker of auto
parts, for example, is no better off than General Motors (ticker: GM) when
there is a decline in car sales.
Salomon Report
But here, the Salomon report comes into play Joseph and his team do not
foresee a decline in demand for semiconductors; rather, they believe that the
industry's supply will finally catch up to and overtake demand, leaving a glut of
chips in the market.
Therefore, it is reasonable to expect that many related industries will not be
affected to a great degree. In fact, companies that purchase finished chips, like
recent IPO Handspring (ticker: HAND), could actually benefit from lower prices.
Too Soon To Tell
It will be impossible to gauge the full impact of the Salomon report on the IPO
market until some new semiconductor companies attempt to come public. But
until then, IPO market observers have some reason to be optimistic.
Dan McCarthy is Staff Reporter at IPO.com
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Tom B. |
