ssb is quoting Einstein now :-))
08:56am EDT 30-Jul-01 Salomon Smith Barney (Jonathan Joseph 415-951-1887) 6502
The Semiconductor Beat
SALOMON SMITH BARNEY Industry Note
Semiconductors
The Semiconductor Beat
July 30, 2001 SUMMARY
* For the first time since we upgraded the sector in
Jonathan Joseph April, we have begun to get "bottoms up"
415-951-1887 confirmation from a wide variety of sources that
jonathan.joseph@ssmb.com business in the personal computer and wireless
Dunham Winoto markets is improving.
415-951-1875 * Price stability in the Intel processor spot market
spread to AMD processors as well, which were once
Ramesh Misra again unchanged on the week. The discount to list on
415-951-1883 Intel processors narrowed by a point to 19%,
however, the discount to list on PIIIs widened by a
point to 23%.
* DRAM prices for both 128Mb and 64Mb parts fell
about 2% on the week, mostly on Friday. 128Mb SDRAM
finished the week at $1.61, while 64Mb parts were at
$0.80. Volumes remained low as most brokers stay
lean.
* Flash trading was also very light last week, and
prices stayed unchanged: 32Mbs at $7.50, 16Mbs at
$4.83, 8Mbs at $4.75, 4Mbs at $1.75, and 1Mbs at
$1.63.
BOTTOMS-UP EVIDENCE NOW LENDING SUPPORTING TO OUR TOP-DOWN CALL
"The eternal mystery of the world is its comprehensibility...The fact that it
is comprehensible is a miracle."
Albert Einstein, addressing the physics of the stock market in 1936.
Admittedly, the sector upgrade call we made in April has some long-bomb, "Hail
Mary" aspects. We decided for several reasons to make an early call, not the
least of which was the recognition by all of our major competitors that the
sector would likely set a cyclical bottom in late summer or early fall. The
call was supported by four major points: 1) "Three bottoms or a funeral (our
own)" in which we expect year-to-year changes in orders, year-to-year changes
in unit shipments, and year-to-year changes in dollars to bottom in Q3. 2)
Capital spending cutbacks by 30-35%, a record pace, would result in a
reasonably rapid absorption of excess capacity. 3) Inventories would soon come
under control. 4) Valuations were not as excessive as many people thought.
If anything, the top-down data has become more powerful. In May, we found that
DOC orders had stopped falling on a year-over-year basis. Single-month orders
grew from $4.5 billion in May to $6.5 billion in June. On a three-month basis,
orders declined by 41% in May and by only 40% in June. DOC data is notoriously
volatile. Even so, it looks to us like an order bottom is being put in. On the
capacity front, not only are companies continuing to revise downward their
capital spending plans, many are now taking capacity off-line for greater or
lesser periods of time: Toshiba (6502.JP-Y571, 3M), NEC (6701.JP, Y1,529, 2H),
Hitachi (6501.JP, Y1,021, 2M), Fujitsu (6702.JP, Y1,104, 2H), UMC (UMC-$8, 1M),
Chartered# (CHRT-$26, 1H), Conexant (CNXT-$9, NR), and others, are taking
capacity off-line because their marginal cost of manufacturing is now greater
than the market price for their goods. And it is no longer controversial that
inventories in the personal computer and wireless handset markets are widely
considered to be at reasonable levels.
Perhaps more important is the fact that "bottoms up" anecdote has begun to
support our top-down call. As one of our salesmen mentioned a month ago, "My
clients are tired of hearing that it is not going to get any worse, they want
to know when it is going to get better." We think evidence is coming in to
support the view 'it is getting better.' We have mentioned over the last
several weeks the relative stability in the spot market for microprocessors and
the general (though not rock hard) firmness in the DRAM market as good signals
that the personal computer market could be firming. At least one large U.S.
white-box maker we spoke with thought reports of PIII shortages developing in
the European clone market (see below) were credible given Intel's recent
announcement it would "end of life" that product in coming quarters. Legacy
buyers could be looking to build buffer inventories. And over the last two
weeks there have been at least 10-12 suppliers of wireless handset components
from On Semiconductor# (ONNN-$4, 2S) to Texas Instruments (TXN-$35, 1M) to ST
Microelectronics# (STM-$32, 1H), reporting a pickup in demand for wireless
handset components. Things will get better we believe. In fact they are already
getting better.
MICROPROCESSOR PRICING STABLE AS CHIPSET SALES CLIMB
The price stability that Intel (INTC-$29, 1M) processors have been showing of
late, this week spread to AMD (AMD-$18, 1S) processors as well, which were
unchanged over the week. The discount to list on Intel processors grew narrower
by a percentage point to 19%, largely due to the inclusion of the recently
introduced 900 MHz Celeron, which was trading at a 2% discount to its list
price. The recently introduced 1.8 GHz and 1.6 GHz P4s remain relatively hard
to find, and as a result trading volumes for these processors are very light.
The discount to list on PIIIs grew wider by a point to 23%. Overall trading
volumes for processors last week were light, though most brokers we spoke to
point toward robust chipset sales, especially in Asia, as a harbinger of a
pick-up in processor volumes over the next few weeks.
On Monday, Intel will formally introduce its 0.13-micron PIII processor
(Tualatin), which is primarily targeted at the mobile and the ultra-dense
server segment. Tualatin's 0.13-micron geometry will allow the processor to run
at a lower voltage, and consequently consume lower power and generate less
heat. Thus the focus on the mobile and dense server markets.
And interesting note from our personal computer analyst in Taiwan, Jason Lin,
who last week visited Microstar (2377.TW-NT$88, NR), one of Taiwan's tier-1
motherboard makers. The company is expecting July shipments to be up 10-20%, in
line with our overall outlook for the Taiwanese mobo business. Microstar
expects to see further sequential growth in August and September. It seems the
i845 chipset (Brookdale) is on allocation, and may hurt some of the clone
makers, though it will not likely impact the OEMs. As mentioned above, the
company has heard of a PIII shortage among the whitebox makers in Europe, a
report we find interesting, but not one we would yet put much weight on. P4
mobo shipments are now running about 10% of the total, with the target 50% by
the end of Q4, which may be a little aggressive. AMD currently makes up about
20% of total shipments, unchanged.
DRAM DOWN A TICK AT END OF WEEK
Spot market prices were flat most of the week, but downticked on Friday with
both densities ending modestly lower on the week. 128Mbs fell from $1.64 to
$1.61 (down 1.8%). There are some reports of volume "off contract" deals being
done in the $1.50-$1.60 range, above the "published prices" of $1.60-$1.70, but
these prices have not changed materially in the past several weeks. Most
branded 64Mbs were quoted at roughly $0.80 (down 2.0%) this week. By
comparison, 256Mb prices appear to be closing the parity gap with 128Mbs. They
are currently in the $4.00-$4.25 range ($2.00-$2.12 128Mb equivalent), but
apparently drifting lower by the week. Some brokers complained that volume has
been light this past week even as quarter-end pressure pushed prices lower.
With many spot market players on the sidelines, a fair share of the volume
seems to be driven by professional speculators who are betting that prices may
rise in coming weeks. Manufacturers, who ship direct, report somewhat better
demand. Now that inventories at the PC manufacturers are very low, direct
shipments, they report, now represent real demand.
FLASH FLAT AGAIN THIS WEEK
The Flash market seems to be taking a cue from the DRAM market. Broker activity
is reported to be light, and availability plentiful in all densities. Sharp
cutbacks in supply are likely to eventually help the segment. Recently, a major
Japanese supplier announced a four-week shutdown at one of its facilities in an
attempt to remove some excess capacity. They are not the only one. There was
market chatter that many more "quietly" reduce production as spot prices have
fallen a steep 56% (16Mb) and 47% (8Mb) since December and are now below
marginal cost for some players. As we indicated in a recent Semi Beat, a
recovery in the wireless segment would go a long way to firming Flash prices.
We have begun to hear of an improvement in component sales into the handset
market. While we think there is still too much supply on hand to positively
impact pricing any time soon, the news out of the handset component suppliers
is certainly not a negative. Meanwhile spot prices for all Flash densities were
flat this week; 32Mbs ($7.50), 16Mbs ($4.83), 8Mbs ($4.75), 4Mbs ($1.75), and
1Mbs ($1.63). |
