October 11, 2000
Dow Jones Newswires
With Semiconductors Sure Bets Are Dwindling In Stk Mkt
By DONNA FUSCALDO
Of DOW JONES NEWSWIRES
NEW YORK -- The number of sure bets seem to be dwindling. Last year, the New
York Yankees were a shoo-in for the World Series and semiconductors stocks
continued to be the high flying darlings of wall street.
But the Yankees might not win its 26th World Series this year and a string of disappointments out of the
semiconductor sector this quarter is souring investor sentiment.
To be sure, you need not look further than the Philadelphia Semiconductor Index, or SOX, for proof.
Tuesday, the index finished a treacherous session down 10%. And although is regaining some of its losses
Wednesday, confusion and fears seemed to be the major themes for chip stocks.
The same day that downgrades on communications chip stocks Altera Corp. (ALTR) and Xilinx Inc.
(XLNX) sent the SOX down 10%, International Business Machines Corp. (IBM) announced it would
invest $5 billion over the course of several years to build semiconductor plants for the production of
communication chips as well as chips that go into powerful servers. And while some high-profile analysts
were concerning themselves with slowing demand for communications chips in the next few quarters, Big
Blue was sending a strong message that those chips will continue to grow exponentially. In fact IBM's
Chairman and Chief Executive Lou Gerstner predicted that with the new plants Moore's Law will be intact
for at least another decade.
With all of these conflicting messages, what are investors to do? Should they be running to the hills
screaming sell of should they embrace the premise that the cycle for communication chips has not peaked.
As communication chip companies begin to report earnings this week, that is sure to be the million dollar
question. (Sorry Regis).
"Absolutely there is a lot of confusion," said Prudential Securities analyst Hans Mosesmann. First there was
the slow down in the personal-computer market, then concerns over wireless handset demand, and now
investors are looking toward other markets within semiconductors that were once considered solid, he
said. But when confusion rears its head, there are opportunities for investors to make a profit. And
Mosesmann said the near-term doubts creates a very compelling buying opportunity.
Indeed the third quarter has been a turbulent time for chip investors. The fears, speculations and genuine
concerns started in the early part of September and have not abated.
The day after Wall Street came back from a little Labor Day rest and relaxation, a controversial analyst at
U.S. Bancorp Piper Jaffray shocked the markets with a downgrade on Intel Corp. (INTC), saying that the
company is suffering from weak demand.
Soon after worries over cellular phone demand crept into the performance of communications stocks.
Then Intel confirmed what most had feared when it warned that revenue would not meet expectations.
Chip investors, who had enjoyed record gains last year, moved into communication chip stocks, hoping
that the growth there would continue to explode. Even Wall Street joined the frenzy with some analysts
predicting that the next tech bellwethers wouldn't be the Intels of the world but rather communications chip
companies like Texas Instruments Inc. (TXN).
In Tuesday's downgrades of Altera and Xilinx analysts cited a weakening market in general purpose
semiconductor chips and slowing revenue growth rates for the remainder of the year. Those downgrades
sparked a sell-off in anything chip and continued for the early part of Wednesday
"The downgrades did not contain any new information and I don't believe any of those downgrades were
accompanied by a reduction in estimates," said Rick Billy, an analyst at S.G. Cowen Securities. The
analysts in there notes said the growth rate at Altera and Xilinx will slow from 25% a quarter, noted Billy.
"If that surprised anyone then they had unrealistic expectations," he said.
As Billy sees it the semiconductor cycle had another year-and-a-half of growth. In the beginning of the
year semiconductor customers were concerned with inventory shortages and started accumulating
components. Today there is less concerns since capacity is readily available, the analyst noted. Since
customers are no longer building a inventory buffer, it gives the appearance of slower demand, he added.
Every semiconductor cycle has a double peak dynamic, said Prudential's Mosesmann. As far as year over
year revenue growth goes, chips saw the first peak this summer and the second one will come in the
second half of next year, said Mosesmann. The middle of the cycle, however, is "no mans land " for chip
stocks, he said. Regardless of near-terms concerns, Mosesmann is convinced that there will be a shortage
of silicon wafers over the next one to two years, an assessment that he said IBM recognizes. "In this
business you can't look near-term, and make decisions based on today," said Mosesmann. "IBM is
making the case that they better have plenty of capacity two years down the road or they will miss a
tremendous opportunity."
IBM said Tuesday it plans to invest $5 billion over the next two years to expand semiconductor
manufacturing. The plans calls for the construction of a $2.5 billion facility in East Fishkill, N.Y., and the
balance of the $5 billion going to upgrade several chip-making facilities in Europe, Japan and the U.S.
Mark Edelstone, an analyst at Morgan Stanley Dean Witter said Tuesday's downgrades were "clearly
yelling fire in a crowed movie theater." In reality, Xilinx's business is fine and when the company reports it
will not only meet or exceed expectations, it will be able to report that the outlook is at least as strong if
not stronger than previous quarters, said the analyst.
Edelstone agrees there are near-terms issue for semiconductor stocks, slower demand for PCs and a
inventory correction in the wireless handset space, but he said those are old issues and not new
commentary.
Semiconductor stocks whip up and down on a seasonal basis, noted Gerard Klauer Mattison analyst Jack
Geraghty. "Here we are once again. Halloween is coming through and its Nightmare on Elm Street slashing
semiconductor stocks."
Shares of Altera, which fell 27% Tuesday, closed Wednesday up 3.8%, or $1.19, at $31 on volume of 21
million shares. Average daily volume is 9.8 million shares. Meanwhile Xilinx's stock closed up 4%, or $
2.38, at $64.81, on volume of 15.3 million shares. Average daily volume is 7 million shares. The stock
finished Tuesday's trading session down 21%.
-Donna Fuscaldo; Dow Jones Newswires; 201-938-5253
donna.fuscaldo@dowjones.com
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