Placing Your Bet on Chips
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Technology: INVESTING Q&A
If you want to put your chips on chips, the place to look now is programmable logic devices and semiconductor-equipment companies. That's the opinion of Manoj Nadkarni, founder, president, and editor of the ChipInvestor.com newsletter.
Programmable chips, or PLDs, make it possible to bring new products to market more quickly and cheaply, says Nadkarni, and in that area he has buy ratings on Actel and QuickLogic. In the equipment field, he likes Asyst Technologies, which makes products for automating the chipmaking process.
Nadkarni is neutral on giant Intel, which is doing well in microprocessors but still waiting for a revival in corporate spending on information technology. Some price pressures may also be in store, though Intel is a leader in making faster processors and is also doing well in emerging markets such as China and India, he says.
These were some of the comments Nadkarni made in a chat presented May 5 by BusinessWeek Online on America Online. He was replying to questions from the audience and from BW Online's Jack Dierdorff and Karyn McCormack. Following are edited excerpts from this chat. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Manoj, for a quick look at the macro market, do you think this two-day return above 10,000 on the Dow presages some more power on the upside?
A: Well, that's hard to say, especially looking at the Dow. We look at broader indexes, and since we follow semiconductors, we follow the Nasdaq, etc., and certainly there's a lot of volatility and uncertainty in the marketplace.
Q: Semiconductor stocks have had a rough run lately. How come?
A: Well, that's a good question. Many chip companies have posted good results for the March quarter. However, some big-name tech companies have had unsettling news. Now, if you look at small-cap semi stocks, they are doing well, and the S&P 600 SmallCap index is at a 52-week high.
Q: What are your general comments about the semi-equipment industry?
A: The semi-equipment industry is seeing recovery. The order rates bottomed out in the December quarter, and all major companies are showing sequential improvement. This is due to three factors. First, chipmakers are adopting advanced 0.13-micron processes. Second, there is increasing use of copper for metal wiring and use of new insulating materials. And then the third factor is migration to 300-millimeter wafers. So we are seeing capacity expansions by DRAM producers and other chipmakers, all of which are helping companies like Applied Materials (NasdaqNM:AMAT - news), Novellus Systems (NasdaqNM:NVLS - news), and the rest.
Q: When will it be a good time to invest in Intel (NasdaqNM:INTC - news) again?
A: Analyzing Intel is complex. Intel is doing well in its core areas: desktop microprocessors, laptop microprocessors, and 32-bit server processors. The company is doing well bringing faster processors to market, and it has about nine months of lead in migrating to 0.13-micron processes. That will help improve growth margins for Intel this year, and the company has seen strong business in emerging markets like China and India.
As always, if you consider Intel as an investment, you want to look at its primary competition, AMD [Advanced Micro Devices]. AMD is rapidly increasing output of 0.13-micron chips at the German factory, so you should expect some pricing pressure with increased supplies. Also, corporate IT spending has not picked up yet. So, in summary, Intel's core business, microprocessors, is doing well, although its networking and flash-memory businesses have not recovered yet. So you have to consider all these factors, and we have been neutral on Intel for some time now.
Q:What are your thoughts on VTSS [Vitesse]? Short and long?
A: Vitesse Semiconductor, as you know, is a communications-infrastructure company. The stock is currently trading below book value. The company did very well during previous up cycles, but it somewhat diversified from its gallium-arsenide business. Now, in the short run, the long-haul transmission market is very soft. That's hurting Vitesse.
There is some business from the metro market, and the company has new designs and products in the pipeline, which should help in the second half of 2002 and possibly in 2003. One of the problems with Vitesse and other communications companies was that as their revenues nosedived, there was not much improvement in operating expenses. And that has led to heavy losses. That's why you are seeing Vitesse trading at a 52-week low.
Q: Can you explain about the metro market?
A: Those are the chips used for broadband transmissions within metropolitan areas, and those are the markets where there are some investments right now...whereas the long-haul market is more dependent on big-name carriers investing in new capacity. And that's unlikely to happen in the short run.
Q: What are your top three picks?
A: One type of chip company that is doing well in this upturn is programmable logic devices, or PLD, companies. Programmable chips enable designers to modify chip circuitry after a chip is built, and that has unique advantages. You can bring new products to market quickly and less expensively.
One of the companies that we follow, and we have a buy rating on it, is Actel (NasdaqNM:ACTL - news). It's a small-cap chipmaker, and it has strong offerings for military and space applications requiring high reliability. The company's new chips based on flash technology look promising. Actel is seeing many design wins with this new product line. PLD companies, including Actel, have had a diverse customer base and good operating margins during the up cycle. The company has some competition from Xilinx (NasdaqNM:XLNX - news), but we think the whole PLD pie is growing.
Another PLD company we like is a small-cap name, QuickLogic (NasdaqNM:QUIK - news). Its valuations are good, and QuickLogic has had nice sales growth for the last two quarters. Because of the small revenue base, the company is not profitable yet. QuickLogic is doing well with new field-programmable gate arrays. These combine high-speed logic with standard functions. We have a buy rating on QuickLogic, and I have positions in both Actel and QuickLogic.
Q: What are your thoughts on LSI [LSI Logic]?
A: LSI Logic is a midsize company that participates in consumer electronics, storage components, and the communications market. LSI is seeing a slow recovery. The company is improving its cost structure. With the recent stock pullback, valuations are looking better. Also, LSI has a respectable balance sheet. Because it has some exposure to the communications market, the near-term recovery has not been as strong.
Q: In answering the question about your three top picks, you gave us two -- Actel and QuickLogic. Do you have a third?
A: Well, first of all, they are not necessarily my top picks -- they are examples of companies we cover. There are other companies that we like, and the examples that I gave were chip companies. There are a few equipment companies we like.
One of them is Asyst Technologies (NasdaqNM:ASYT - news). It's a leading maker of products to automate chip manufacturing. As chipmakers migrate to 300-mm wafers, automation content increases substantially. We feel Asyst is well positioned to benefit. It has strong customer relationships with the leading foundries in Taiwan and with the major chipmakers in the U.S. The valuations are good.
Asyst had some competition from Brooks Automation (NasdaqNM:BRKS - news). We think the recent joint venture between Asyst and Shinko Electric will open new market opportunities for Asyst. We have a buy rating on Asyst, and I have a position in this stock.
Q: Why does TXN [Texas Instruments] have such a high stock price when most of its sales are to the phone business?
A: Well, first of all, there is nothing wrong with the phone business, or any particular business. The reason Texas Instruments is doing well is because it produces chips that enable next-generation wireless devices -- the 2.5G and 3G handsets. Texas Instruments is the leader in DSP technology, and in addition, its analog business is doing very well. It is a very well-managed company, and we think a combination of cost controls and revenue growth will make TI profitable beginning in the current quarter. These are some of the reasons why investors like TI.
Q: Recently, I hear mixed reviews on Applied Materials (NasdaqNM:AMAT - news). What are your thoughts on it?
A: Applied Materials is, as you know, the largest equipment company. It's a market leader in many segments, and equipment order rates are gradually rising. We explained earlier the driving factors for new equipment business -- 300-mm expansion, 0.13 micron, etc. Now, Applied Materials has a guidance of 10% to 15% sequential improvement in order rate for the April quarter. We think AMAT will exceed that when it announces results in a few weeks.
Q: How about TSM [Taiwan Semiconductor]?
A: Because TSM is such a major participant in the semiconductor industry, we follow developments at TSM, but more so from the standpoint of understanding how it influences the equipment industry, process development work, etc. For a few reasons, we are not looking at TSM as a stock to invest in, but we certainly keep track of it. TSM, UMC [United Microelectronics], and Chartered Semiconductor (NasdaqNM:CHRT - news) have essentially enabled the fabless companies' businesses. They support them.
Q: What's your opinion about PMCS [PMC-Sierra] and AMCC [Applied Micro Circuits]?
A: PMC-Sierra and AMCC are communications chipmakers. First of all, PMCS saw some sequential increase in the March quarter. However, the telecom segment is still soft. Companies like Nortel (NYSE:NT - news) and Lucent (NYSE:LU - news) are hurting, and that has had an impact on these two companies. One thing that stands out about PMC-Sierra compared to other communications players was that they did curtail operating expenses as their revenues dropped. So their breakeven is high, but it's improving.
Q: What is your opinion on KLAC [KLA-Tencor]?
A: Well, KLA-Tencor makes equipment for diagnosing and monitoring chip manufacturing processes. It is a leader in its field. The company is seeing strong business from foundries in Taiwan as chipmakers move to advanced processes and new materials like copper and larger wafers. It's necessary to analyze processes thoroughly, and that's enabled by KLA equipment [see BW50, 3/25/02, "Soaring Despite the Chip Slump"]. We expect sequential improvements in revenues, bookings, and net income. The stock moved up nicely in the last six months, before coming down some.
Different company examples in this chat are for the purpose of illustrating ideas. They are not an endorsement by Mr. Nadkarni or ChipInvestor.com, nor a recommendation or offer to buy or sell securities. Any action taken by you as a result of the discussion here is strictly at your own risk. Mr. Nadkarni or ChipInvestor.com shall not be liable for any gains or losses resulting from such actions. You should be aware that Mr. Nadkarni has positions in some of the stocks discussed.
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