Applied and Novellus - A write up by resident bear Herb Greenberg today
Applied logic: The stock of Applied Materials (AMAT:Nasdaq - news - boards) has already been clobbered along with the rest the chip-equipment sector. But now the buzz among my sources is just how bad the situation at the company -- and the sector as a whole -- is getting. There's a growing belief by analysts that Applied's fiscal second-quarter revs could be more in the range of $1.5 bil, well below the company's guidance of $1.9 bil to $2.1 bil. Banc of America analyst Mark FitzGerald went a step further Friday with a report that lowered estimates for this year to $7.1 bil from $8.6 bil, while slashing them next year to $5.8 bil from $9.9 bil. "The bigger issue," he says, "is that U.S. and European chip device companies are bringing their cap spending down hard." So hard, he says, that he wouldn't be surprised to see investors startled as chipmakers report sharply lower first-quarter and second-quarter gross margins, as they shut down plants (which causes unit prices to skyrocket).
The implications for chip-equipment makers are the possibility of more disappointments and more pressure on the stock. How low can it go? Depends on whether history repeats itself. If it does: In 1998, AMAT, which closed Friday at $43.50, traded at three times book; book value is about $9 per share (multiplied by three is $27). And in 1996 it traded as low as one times sales. Based on FitzGerald's projection of $5.8 billion in revenue next year, that would translate to a price of around $7.
Will it ever get that low? (It did in the mid-1990s.) Even my most bearish shorts don't think so, but they don't believe the $20s are unrealistic. Right now the chip-equipment makers are favored by large investors who believe stocks like these are good hiding places because once the cycle rebounds, they could quickly quintuple their money. They also believe that unlike past downturns, this one doesn't just affect chipmakers; it is hurting all of technology.
What's more, AMAT has never had a stretch this bad. A rebound, some industry watchers believe, could take longer than those hiding in the stock expect. After all, between now and then there could very well be more disappointments and warnings -- enough to turn this hiding place into a trap.
Needling Novellus: In recent years, chip-equipment maker Novellus (NVLS:Nasdaq - news - boards) has been positioning itself as the company to call for copper connectivity tools. Our new best buddy, Fred Ramberg of Fechtor Detwiler, says that Novellus (which neither he nor his firm is short) was recently invited by Intel (INTC:Nasdaq - news - boards) to join Applied Materials in a bake-off of sorts to test a Low-K dielectric process tool that deposits a special film that is critical in the use of copper. To his surprise, the winner in the first round of tests was ASM International (ASMI:Nasdaq - news - boards), based in the Netherlands, which had asked to be included in the trials. As it turns out, Ramberg says, Intel ordered some tools from ASM to build a pilot product line. Intel liked ASM's film, judging it to meet the standard, and told Novellus to take a hike. (Its film apparently was too soft.)
That's not good news for Novellus, which now must go back to the drawing board. "We're in a bad downturn, and they can spend a lot of money, depleting their cash reserves on R&D at the worst possible moment," Ramberg says. "And then they have to hope they haven't missed the boat." Not that Novellus doesn't have the cash: As of the end of December, its coffers were bulging with more than $1 billion.
What's more, says a Novellus spokesman, "The adoption of Low-K dielectric is still very much in its infancy. Most of these companies are still evaluating these in their advanced development labs and still are trying to make production decisions on which ones they're going with."
Perhaps, but consider the paradox: Novellus may be the only chip-equipment maker that actually benefits from a prolonged decline. The longer the downturn lasts, the more time Novellus has to work out the kinks in its technology. You can almost hear the clock ticking. |
