Recovery pushed back to 2003? When is the next SIA and SEMI b2b report due?
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SmartMoney.com - Sector Patrol
From Bad to Worse...to Better?
By Monica Rivituso
BEFORE THE SEPT. 11 terrorist attacks, many analysts expected the semiconductor industry to start showing signs of recovery in the third or fourth quarter. Sure, PC sales — which still represent the largest end market for chips — were lackluster during the back-to-school shopping season. And those hoping for a seasonal uptick in the fourth quarter certainly weren't expecting the frenzied buying of late 1999. It was small, incremental improvement that analysts were hoping for.
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Obviously, things have changed. ``With what took place in New York, Pennsylvania and Washington, it seems to me that that's out the window now, and we're going to have to hold on for another three, six or nine months,'' says Brian Matas, vice president of market research at IC Insights. Adds Mary Olsson, chief analyst for Gartner Dataquest's world-wide semiconductor group: ``If the year wasn't bad enough, it's definitely going to get worse. All the companies here as well as in the Asia Pacific are really worried.''
Indeed, companies that saw some business improvement in the third quarter have watched sales slow considerably since Sept. 11. Now, many on Wall Street are expecting chip-industry sales to decline in the 30% range for the year, vs. previous estimates for decline in the mid-20% range. (IC Insights is forecasting a 34% decline, while Gartner's current forecast stands at a decline between 30% and 35%.) Industry watchers now think a recovery will be pushed out a couple quarters — meaning there might not be signs of improvement until the middle of next year. After that, it's anyone's guess. IC Insights thinks the industry will grow 14% next year, while others, including Bear Stearns, expect flat growth.
While there are some types of semiconductors that were on stronger footing before the disaster (such as microcontrollers and simple diode chips, whose inventory problems weren't as severe), there's one issue that looms over the entire sector: the economy. It's little surprise that this is the big wildcard for chip makers, since semiconductors now permeate more areas of the overall economy than they did, say, 20 years ago. And as their sales become more pervasive, companies' prospects tend to reflect the general economic climate all the more, explains Thomas Smith, semiconductor analyst at Standard & Poor's. Whereas chip cycles have historically been characterized by booms and busts associated with either too much or not enough manufacturing capacity, in the past five years it seems that demand has marched more in step with the economic climate.
``Just in the past decade it seems that the downturns have been precipitated as often by general economic conditions as by the industry's own imbalances between supply and demand,'' says Smith.
But while semiconductors might be more closely tied to the economy, industry watchers say this doesn't mean it's no longer a cyclical industry. Therein lies a slight — we repeat, slight — silver lining for investors: After busts, booms are born. Businesses had already cut back in buying new technology before the Sept. 11 attacks, and now consumer spending — which had held up until late — is waning as well. But come the second half of next year, there could very well be some pent-up demand, says Linley Gwennap, founder of The Linley Group, a technology market-research firm.
``I think when things do come back, they will come back pretty strongly,'' says Gwennap. ``It's kind of a question of when consumers and businesses start feeling comfortable about spending money again.''
Where will money likely be spent first? There are a variety of opinions out there. Some say communication-chip makers, despite the hits they've taken in recent months, could be some of the initial beneficiaries as sales of cell phones and wireless-communication devices improve. Companies such as Analog Devices (NYSE:ADI - news), Texas Instruments (NYSE:TXN - news), National Semiconductor (NYSE:NSM - news), Linear Technology (NASDAQ:LLTC - news), Fairchild Semiconductor (NYSE:FCS - news) and STMicroelectronics (NYSE:STM - news) all have exposure to these areas. In addition, research and development is still ongoing, notes Gwennap. That means cell phones, digital cameras and even networking gear are all continuing to improve, and by the middle of next year, there'll be more compelling products to help spark sales.
Gartner's Olsson, meanwhile, sees the automotive and industrial markets rebounding before communications does. In fact, this already seems to be the case. Gartner expects sales in the automotive semiconductor market to increase 7% this year, far better than the massive dive the overall global chip sector is expected to take. Motorola (NYSE:MOT - news), NEC (NASDAQ:NIPNY - news) and STMicro are the top three players in this market, according to Gartner.
So while the economic news remains dire, Wall Streeters rush to cut earnings forecasts and companies prepare to ratchet down expectations, some optimism remains. ``As bad as it is right now, and [will remain] through 2002, this [period] sets up the cycle for another big boom period,'' says IC Insights Matas. ``I guess that's the one positive you can draw out of this.''
Let's hope he's right. |
