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Small Semiconductor Secrets
New York, Aug 21, 2001 (123Jump via COMTEX) -- Legends of the Fall
Somebody stop semiconductor skeptics, please. They were OK in October 2000 - it
was a good call not to buy the upbeat forecasts for 2001. Last fall, their
voices were muted in the overall optimism, but by and large they had their
I-told-you-so moment this year when the sector sales slumped, instead of rising.
Right now, in mid-Q3 2001, it's good to hear some songs of praise for a change,
on the beat of solid facts and figures.
Big Picture
Let's start with the broad indicators.
Assumption No. 1: "The semiconductor sector drags down the tech stocks this
year."
Wrong. Year-to-date (YTD), Nasdaq lost 18.5%, while the Philadelphia
Semiconductor Sector (SOX) index lost barely 2.6%. Unlike the Nasdaq, since
January 2001, the SOX stayed mostly above the zero line. It had some eight or
nine short dips below its January 2 level, but they were less than a week long.
The longest sub-zero period was between March 28 and April 11.
Lack of Leadership
Assumption No. 2: "Since big companies are clearly defensive, there is an
obvious lack of leadership."
Wrong again. Big is something very relative. It is still a $160 billion industry
by conservative estimates. Agreed, it is less than Intel's (INTC) market
capitalization alone. But there is no one-stop chip shop, no matter how "big"
some companies are. It would be illegal. All ticker symbols are equal before the
market, where percentages count. And yet, it is easy to show that within the
broad industry, sector leadership is not a scarce commodity.
Something Special
Let's take the case of NVIDIA (NVDA) - the clear leader in a subsector of
specialized semiconductors - graphic chips. Market cap - $5.8 billion. YTD stock
price gain - 178%. Last reported quarter - Q2 fiscal 2002 - setting new records
both in revenues and income. In the past six months, NVIDIA rang in more than
$500 million in revenues and the way things are going it may achieve its first
billion in annual sales no later than Christmas. Small? Defensive? Come again.
Following the leader, other graphic chips manufacturers can also take pride in
their stock price history. NVIDIA's main competitor ATI (ATYT), a $2.3 billion
company, is up 67% YTD; the audio chip legend that moved to video, ESS
Technology (ESST) - up 202% YTD; Zoran (ZRAN), that stormed the market with
video signal processing chips - up 133% YTD; Trident (TRID), another video chip
old-timer - up "only" 66% YTD, but it is one of the fastest growing stocks in
the past month and hit a new YTD-high on August, 20; NeoMagic (NMGC), the video
chip that once conquered the laptop market - up 28% YTD.
Isn't this a growing sector, led by a clearly marked leader, whom some of the
followers even tend to outrun? This is merely a rhetorical question.
Moving to other specialized semiconductor fields, we have Microchip (MCHP), the
microcontroller maestro and Electronically Erasable Programmable Read-Only
Memory (EEPROM) expert with $4.3 billion market cap - up 48% YTD. Roaring in the
wake, is another EEPROM and diverse integrated circuits manufacturer, Xicor
(XICO) - up 247% YTD.
Let us now gently step into the communication chips minefield and look for some
survivors there. LSI (LSI) with a market cap of $7.8 billion is up 21% YTD.
Teetering on the brink between small and mid cap, the $933 million worth Silicon
Laboratories (SLAB) - is up 32% YTD.
Of course, the picture won't be complete without the "big issue" -
microprocessors and memory chips. That's where the bombs kept falling, right?
Peruse. . .
What lies beneath the fog of the microprocessor war?
We have Intel, whose stock is down 9% YTD, but the No. 1 chip maker has very
long arms and there is always another trick up its equally long sleeve. The
wrangling rival AMD (AMD), however, hardly had a tread in the red this year, and
still is up some 0.6% YTD. A good time to repeat that the Nasdaq is down 18.5%
YTD. Those expecting to look at the charts and see investors fleeing down the
slope, will probably see only the guests leaving, scared by the gunshots. The
diehards still seem engulfed in the action.
In memory chips, the ugliest sub-sector, where never-before-seen price drops and
inventory write-downs dominate the news - surprise, surprise. Micron (MU), the
largest non-Asian manufacturer and No. 3 world-wide, is still up 2% YTD. The No.
1 and No. 2 memory makers are Korean Samsung (SSNHY) and Hynix, but their stocks
are traded elsewhere.
Japanese NEC (NIPNY) and Toshiba (TOSBF) finally acknowledged that the memory
match was too rough for them, and are quietly departing from this market. NEC is
currently transferring all its Dynamic Random Access Memory (DRAM) production to
Elpida, while Toshiba recently cut its output by some 26%, after closing its Fab
1 line in Japan.
Broadly Bent?
A logical conclusion is that specialization is good. Yet, even among the
companies with a broader portfolio of semiconductor offerings, the market has
shown a clear dislike only for some of the large caps - Texas Instruments (TXN),
STMicroelectronics (STM) and Infineon (IFX).
In the mid-cap zone too, the picture is not too bleak. Intersil(ISIL), a $3.9
billion company, is up 72% YTD; National Semiconductor (NSM), $5.5 billion
market cap, is up 59% YTD; and Cypress (CY), $2.9 billion market cap, is up 19%
YTD.
The Red Thread
The above data explains why the semiconductor index remained mostly flat in
2001: what some large caps shed in stock value, some mid and small cap companies
were fast to grab.
The figures also hint toward a sustained stock resilience to sharp industry
downturns. It is to be expected in such a mature sector. True, this holds little
consolation for Applied Micro Circuits (AMCC), Infineon (IFX) or Rambus (RMBS)
stockholders. They did see their investments reduced to a mere fraction of their
value from 12 months ago. And no one could blame them - those stocks were
high-profile, growth-bound picks that didn't make it in an extremely harsh
period - along with many others in many other sectors.
The Swing of the Pendulum
The most recent update from Gartner Dataquest forecasts semiconductor revenues
to drop 26% to $168 billion in 2001 from $226.5 billion in 2000. The second
quarter was particularly nasty - a 20% drop from the first quarter. The sector
breakdown shows what the market already knows from the stock charts - digital
video kept growing, while communication chips continued to slump.
For those looking for some answers in the cyclical nature of the industry, the
substantial growth in 2000 may, to some extent, explain the considerable decline
this year. The question is, however, - is this just a nine-month to twelve-month
cycle?
The pendulum moves fastest in its lowest point, and that 20% decline in Q2, 2001
was pretty fast. Still, analysts face a major headache in trying to pinpoint
that lowest point in the remaining two quarters .
If the rebound happens in Q3, Dataquest expects a modest 12% growth in 2002. If
the slump continues through Q4, however, the projected growth for 2002 is
between 6% and 9%.
Either way, the number crunchers are looking for a "bottom" in the next couple
of months, but the market relevance of this statistical occurrence remains
doubtful. Once again, the SOX index shed merely 2.6% YTD, which is exactly 10
times less than the 26% slump in semiconductor sales estimated by Dataquest.
Win on the Roundabouts
Investors looking to win on the roundabouts what they lost on the swings, have
two broad options - to bet on the gainers mentioned above, given that the bottom
is near, or to take the low road and look for some semiconductor sleepers.
An interesting recent knee-jerk sale in the sector was that of solar panel
manufacturer AstroPower (APWR) shares. Its stock price has had three similar
dips and rebounds this year, kept fluctuating between 28 and 55, and is now
traded at 32.8, close to its January 2, 2001 price of 33. The last quarter
reported August 2 marked record increases in both revenue and income. The
company had no news to explain the last dip in its share price, and the stock
was probably dragged down by the August 17 energy sector bash.
EMCORE (EMKR), a supplier of semiconductor manufacturing technology, reported
August 8 its sixth consecutive quarter of record earnings. What is more
important, the company went positive on its Earnings Per Share (EPS) figure - 3
cents versus zero in the previous quarter ended March 31, 2001. The market still
seems to be digesting the news, and the stock is currently at 14.65, near its
52-week low of 14.20.
This could have something to do with the fact that EMCORE is recently offering
some products for the optical networking sector - still a painfully-familiar
danger zone for investors.
In the brightly lit lane of video chips, there is still a company that seems to
be worth a second look. 3Dlabs (TDDD) used to be very popular a couple of years
ago with its Permedia video accelerators, and is currently boasting top
performance for its Wildcat line of video chips for the workstation market. The
company kept shrinking its losses and returned to profitability on an operating
basis in the last reported quarter, ended June 30, 2001.
On August, 20, 3Dlabs closed at 1.04, near its January 2 price of 1.13, and up
68% from its 52-week low of 0.62.
Marathon Medals
Semiconductor stocks this year are therefore like marathon runners. They do look
like they are struggling in the last, 26th mile, but they all know where they're
going and they're going for gold. And even if the group that is trailing is
sizeable, the winners' pace seems right for the course. There are no world
records in the marathon, just medals.
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