Semiconductors
The Semiconductor Beat
May 6, 2002 SUMMARY
* Three points our economist made last week: 1) Though
Jonathan Joseph still down, spending on computers and communications gear
is clearly improving, 2) strong IT capex is closely
correlated to S&P500 earnings growth, which will likely
Dunham Winoto be an '03 event, 3) IT capex as a pct. of GDP peaked at
4.9% in 2000, is currently at 3.9%, but higher than the
3.0%-3.5% levels of the mid-80s- to mid-90s.
Ramesh Misra * Intel processor prices were once again relatively flat,
with the overall discount to list at 14%, while P4s
narrowed a point to 13%. AMD processor prices declined 4%
on the week, largely the result of declines on older
models.
* DRAM was under pressure again last week; 128Mb DRAM
traded down to $2.70 (-10%), 256Mbs closed at $7.04 (-8%)
while 128Mb DDR was lower at $2.85 (-8%). Contracts were
revised down to $4.00-4.30 from $4.25-4.65.
* Flash was flat except 16Mbs (down 1% to $4.93); 8Mbs
downticked 0.3% to $2.83. Others were flat; 64Mbs at
$11.00, 32Mbs at $8.19.
OPINION: IT CAPITAL SPENDING IS RECOVERING GRADUALLY INTO 2003
"The statesman who should attempt to direct private people in what manner
they ought to employ their capitals, would not only load himself with a most
unnecessary attention, but assume an authority which could safely be trusted,
not only to no single person, but to no council or senate whatever, and which
would nowhere be so dangerous as in the hands of a many who had folly and
presumption enough to fancy himself fit to exercise it."
Adam Smith, The Wealth of Nations, 1776
As sector analysts, we keep one eye on the greater economy, but we generally
let the dismal scientists attempt to call the greater macro trends. Last
Friday, we touched based with SSB economist Steven Wieting, whose work we
follow pretty closely, to get his latest thoughts on the economy as a whole
and information technology spending in particular. He made several points
(some of which we added a bit to):
1) Though still down about 19%, U.S. orders for computers, communications,
semiconductors and peripherals are in a recovery trend. Moving into 2H '02,
comparisons should continue to get easier. Overall spending appeared to
bottom (as did the semiconductors) in Q3 of last year at about --35%, and as
mentioned are currently at about
--19% but likely to resume positive comparisons by late this year. Somewhat
mirroring these figures, overall IT capital spending is down about 10%
currently.
2) There is some correlation between IT investment growth and S&P500 earnings
growth. Despite last quarter's strong GDP report, the U.S. economic recovery
remains tentative. As such, strong corporate earnings growth (and therefore
strong positive IT investment comparisons) will likely be a 2003 event. If
you needed to be reminded, IT capex growth and NASDAQ performance are highly
correlated.
3) IT capex peaked out at 4.9% of GDP in late 2000. Despite the decline to
the current level of 3.9%, IT capital spending as a percent of GDP is still
above the 3.0% level hit in the economic slowdown of 1987 and the recession
of 1990. Through most of the late 1980s and early 1990s, it ranged between
3.0%-3.5% of GDP, and displayed an impressive 30-year uptrend.
Wieting's conclusion: despite the current mood in the stock market, "things
are moving in the right direction", with a recovery likely to be a multi-
quarter event.
FIGURE 1. ORDERS FOR COMPUTERS, COMM EQUIPMENT, AND SEMIS
Source: Salomon Smith Barney and the Bureau of Economic Analysis
FIGURE 2. IT SPENDING AS A PERCENT OF GDP
Source: Salomon Smith Barney and Department of Commerce
PROCESSOR PRICING REMAINS UNCHANGED
The discount to list on Intel (INTC-$27, 1M) processors was flat last week at
14%, and on P4s it improved by a point to 13%. Trading activity continues to
be seasonally soft, with some brokers citing the upcoming launch of the new
integrated graphics chipsets (845G) as one of the reasons for this. AMD (AMD-
$11, 2S) processor prices slipped 4% last week, primarily due to declines in
some of the older Athlon processors. AMD will soon launch the next speed-
grade in its Athlon XP family of processors, the Athlon XP 2200, which will
run at a clock speed of about 1.8GHz. Last week at an investor conference AMD
again mentioned that its 0.13-micron production schedule has been pulled in
by a quarter. This should ensure a timely launch of AMD's Hammer family of
processors, which was recently renamed the "Opteron" family, in Q4 this year.
DRAM SPOT PRICING WEAK; CONTRACTS REVISED LOWER
DRAM spot prices fell between 8-10% last week, impacted by a seasonally
weaker DRAM market, a ramp-up of output at Micron Technology (MU-$23, 1S)
(restarting their 30% reduction in wafers last quarter) and Hynix
Semiconductor (660KS-W805, NR) (bringing HSA back on-line), and concerns over
the impact of a collapse in negotiations between the two. In addition,
manufacturer inventories have crept up by several weeks to the high-end of a
2-4 week range they reached a month ago. Finally, recent SIA data showed some
evidence that the spike in 128Mb prices from about $1.00 in October to over
$4.00 in March, may have had a price-elastic impact on demand. After peaking
at 113% yoy in November '01, bit growth slowed to less than half that at 54%
in March (the latest data available).
Mainstream 128Mbs closed the week down 9.7% at $2.70, while 64Mbs settled
lower as well, down 2.3% at $1.59. 256Mbs were down to $7.04 (-7.9%). At
about 2.6x 128Mbs (well above the more normal 2x parity), 256Mbs have
declined less in recent weeks relative to 128Mbs probably because supply has
been tighter due to manufacturing mix issues. 128Mb DDR was down to $2.85,
7.7% lower than the week before. As we have expected, OEM contract prices
continue to close the gap to the downside with spot prices. Contract prices,
which were at the $4.25-4.65 levels a couple weeks ago, fell to the $4.00-
4.30 range by week's end. Not surprisingly, late May prices are likely to be
even lower given the downward bias on spot market prices, brokers are
suggesting.
FLASH GENERALLY STABLE
The flash spot market saw another week of relative stability with most
densities flat on the week with the exception of 16Mbs (down 1.2% to $4.93)
and 8Mbs (down a miniscule 0.3% to $2.83). All others were unchanged; 64Mbs
at $11.00, 32Mbs at 8.19, 4Mbs at $1.25, and 1Mbs at $0.90. The latest SIA
data reported that flash is showing a gradual improvement. Shipments in March
gained 6 pts to --47% yoy, from --53% in February and --54% in January. The
market also grew 6% on a mom basis. Some Flash manufacturers (Fujitsu-6702JP-
Y981, 3H & Atmel-ATML-$8, NR) are suggesting that lead times for certain
parts have gone from essentially zero in the last couple of months to the ~8-
week range. Atmel reported that fab utilization for its higher density
products (essentially 0.18-micron production) is in the 85 to 90% range. We
expect the market to continue to improve slowly over the next few months
given improving demand from some end-markets and easier comparisons. |
