Tech--Investorlinks.com : "What Comes Next for Chip Stocks?"
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>>> What Comes Next for Chip Stocks?
Research Analyst: Luciano Siracusano
It's never a pretty sight when a company pre-announces on you.
It's even worse when the company in question boasts one of the world's largest market caps, and when most analysts on Wall Street are totally blindsided by the announcement.
But that's what happened Friday, as investors bailed out of Intel Corp. (NASDAQ: INTC) after the world's leading semiconductor manufacturer confessed that it would not meet consensus sales estimates for the third quarter. Intel stock, which traded as high as $74.88 at the end of August, got clocked Friday, closing down more than $13, or 22%, to finish the session at $47.94.
The more than 300 million shares that traded hands were the most ever for a single stock in American history.
The carnage started Thursday, soon after Intel said that third-quarter revenues would only grow by 3% to 5% sequentially from a base of $8.3 billion. Some analysts were expecting as much as 10% sequential revenue growth.
Weakness in Europe and lighter-than-expected demand will likely slow Intel's growth through at least the fourth quarter.
The reality that demand is not strong enough to absorb the current supply of chips to power personal computers and other electronic devices sent the stocks of related companies in the sector reeling on Friday.
"Not surprisingly, a chorus of downgrades hit the wires this morning..."
Although shares of Intel's principal competitor, Advanced Micro Devices (NYSE: AMD) edged higher Friday, Micron Technology (NYSE: MU) and Rambus (NASDAQ: RMBS) came under heavy selling pressure early in the day, although by the closing bell, Rambus actually posted a gain of $3 to $85.50.
The capital equipment companies that supply Intel and its competitors also took a beating. Applied Materials (NASDAQ: AMAT) lost nearly 5%. KLA-Tencor (NASDAQ: KLAC) closed down 12%. And Lam Research (NASDAQ: LRCX) gave up 2.6%.
Not surprisingly, a chorus of downgrades hit the wires this morning, after Intel had already shed 20% of its value in after-hours trading Thursday. UBS Warburg cut its 12 month price target on Intel to $66 from $95, lowering this fiscal year's earnings estimates by seven cents to $1.66 per share, and next year's by a dime, to $1.78 per share.
Intel did not disclose any revisions in earnings guidance in its release. However, gross margins are likely to decline, as pricing power for microprocessors is eroding.
In recent months, we have been increasingly cautious about both chip stocks and semi-cap equipment stocks and are not surprised by the carnage witnessed Friday.
Sentiment for semiconductor stocks was clearly damaged by Intel's disclosure. We would avoid the traditional chipmakers for the next few weeks, as there may be more bad news to come.
Long-term, however, the future is as bright today for the chipmakers as it was at the dawn of the personal computer revolution. Although demand has slowed, in part because of a product transition in cell phones, the sheer quantity of new electronic toys soon to flood world markets will be an immense catalyst for the group.
Cell phones that can receive data at speeds of 2 megabits per second are on their way. That's about 40 times as fast as a standard 56k connection that now exists in most homes. Such gadgets will be available as soon as wireless and optical networks can support such high-speed data traffic, perhaps by the end of 2002.
"Investors are probably better served by turning their attention to those chipmakers that were not badly hurt on Friday."
Personal digital assistants and the next wave of more powerful hybrid "TV-computers" to better handle broadband connections in the home all point to powerful drivers of new demand over the next three to five years. Whether enough capacity will exist to meet that anticipated demand remains an open question.
But judging from recent data from Semiconductor Equipment and Materials International, there is evidence that this semiconductor cycle is, indeed, different from past ones. Strong bookings and shipment data for North American-based manufacturers of semiconductor capital equipment point to unusual strength in a seasonally slow period.
Investors with shorter time horizons are probably better served by turning their attention to those chipmakers that were not badly hurt on Friday - the "communications companies," who depend less on the vagaries of the consumer market and more on the capital expenditures of the large telecommunication carriers.
Broadcom (NASDAQ: BRCM), Analog Devices (NYSE: ADI) and Applied Micro Circuits (NASDAQ: AMCC) shrugged off the Intel news and continued to rally on Friday.
Although the shift in sentiment could depress the valuations assigned to these high fliers, at this point it does not seem that Intel's troubles are a harbinger of things to come for their operations. For these companies are helping to build the next-generation delivery systems through which this high-speed voice, video and data traffic will flow.
Given that telecom capital spending will continue to stay strong in the areas of high speed communications and optical networking, we expect these stocks to continue to outperform traditional semiconductor concerns over the next six months.
"Value propositions are being created for select semi-cap equipment plays."
Indeed, should any pricing pressure emerge for these companies, it could very well improve the margins on the larger equipment manufacturers to whom they sell.
This is one of the reasons why some networking phenoms were actually able to rise Friday, even while the Nasdaq was in the midst of triple-digit losses. Nortel (NYSE: NT) and Ciena (NASDAQ: CIEN) closed higher for the day. The stock of Juniper Networks (NASDAQ: JNPR) , which has for some time been off in its own universe, climbed nearly 7%, or $14.53, to close at $225.64.
Bottom Line:
We would avoid the traditional semiconductors stocks until supply-demand concerns fade from the market. Value propositions are being created for select semi-cap equipment plays. However, right now we are more inclined to use any new Nasdaq weakness as an invitation to nibble at the pure play IC communications companies and the next-generation networkers whom they serve.<<< |
