Excellent explanation of the valuation dynamics of these tech sectors.
I agree that the semis are overvalued compared to previous down cycles. However, this market downturn has yet to be proven to be more than a collapse of the bubble created by an excessive and unsustainable spurt of growth. Underlying both the spurt an contraction I believe that there is a sustainable rate of growth that is still very healthy and greater than the 20 year "normal" industry growth rate. The reason I think that is because several of the drivers for growth provide real benefits of greater efficiency and expanded "reach" that remain attractive for corporate and other spending. Recent surveys by trade journals and services show that corporate spending on networks, Internet servers and web development, CRM software systems and training and other IT expenditures remain a high priority. What has changed is the degree of urgency and the necessity of a high ROI. Efficiency and return are demanded and that's a good thing. After five to nine more months the bubble build up should be exhausted an the networking sector will resume growth, however at maybe 30%-35% rather than the 50%+ seen over the past few years.
The semiconductor industry is more diverse now than it has been at any time in the past. While many segments are vulnerable from economic downturns, this recent downturn has been primarily caused by the bubble collapse and primarily contained, at least so far, within it. Several key sectors of the economy remain strong; retail, consumer spending, housing, services, etc. The PC and server sectors, which started down late last year, have firmed up recently even while the telecommunications sector is in a nosedive. Consumer sales may be relatively strong this Christmas due to new product entries. And employment remains relatively strong. Is fewer than 5% unemployment like any major recession you've ever seen before? The semi sector is arguably much less sensitive to cyclical downturns than it was when dominated primarily by just the PC industry.
However, there is still reason to believe that earnings forecasts will continue to be revised downward. I don't think they have a lot more to move down for semis but time will tell. There is no indication that the trend in downward revisions has reversed toward stability let alone upward revisions. I think that won't happen until well into the summer at the earliest. The industry is very unlikely to go into the degree of tailspin we have seen in the past. I also think that growth of the industry have a possibility of accelerating greater than expected next year.
At this point the probability of the NASDAQ (tech stocks) moving down sharply is much less than it has been and the chance that it will move up over the next 12 or 18 months is pretty good. The interest rate climate is favorable and some tax relief stimulus looks likely. The chance for a big move up soon isn’t nearly as likely. |
