Thoughts on the Semi Cycle:
We have just finished the first year (Late '98 to Late '99) of the growth cycle and are well into our second. I have heard a lot of talk of this being a 3 year cycle (which is typical for the semiconductor industry). If this is so, then we should say that we've just finished the THIRD inning and are starting on the FOURTH. Now, how much of ALL NINE innings have already been factored into the stock? I really can't say, but I do notice how everyone is using FORWARD PE ratios to judge stock valuation; this implies that maybe most of the stock gains have already been factored in. AMAT is worth 5 times it's value at the 1998 bottom. I don't think we will see another 5 fold increase from here...maybe a double at best.
From my experience watching the last cycle, the stock market usually leads the industry cycle by about 6 months. The last real peak (in terms of equipment orders) was early 1996, but the stocks of these companies peaked around late summer 1995. So if this pattern holds true again, we should be seeing a peak in stock prices say around the early to middle of 2001. Now of course, if some external factor comes in (recession, world economic troubles), this whole model goes out the window. Also, in any case, we should not expect the stock prices to go to their 2001 peaks in straight lines. There will be a lot of volatility, as usual.
Now one other thing I noticed in late 1995, as we approached the last industry peak, was that while the stocks were pulling back from their summer peaks, many analysts were still issuing rosy scenarios, saying that the outlook for 1996 was going to be spectacular. I remember BusinessWeek saying (from a year-end 1995 perspective) that the biggest risk for semi-manufacturers was not being able to find enough capacity to fill their orders. Ha...just the opposite happened in 1996. There was also talk that the industry had escaped its boom/bust cycles because of the growing ubiquity of semiconductor demand. Interesting to look at these 1995 sentiments in hindsight...very instructional too.
So in conclusion, while I think we are still in the thick of an expansion phase, and there is still some room to go for these stocks, we should be well aware of the time scale of a growth phase and keep our minds on the facts: 1) cycle started in late 1998; and 2) we're probably looking at a 3 year cycle. Towards the end of the cycle, we may once again be hearing wildly optimistic predictions (kinda disturbing that this has already started), but don't let that throw us off from disciplined investing.
Happy Y2K!! |
