The Chips Are Down
Arik Hesseldahl, 12.23.02
forbes.com
StarMine five-star analyst Mark FitzGerald was ahead of many of his peers when he boldly called a slowing long-term growth rate for the semiconductor business. His outlook for 2003 doesn't get any rosier.
In December 2001 Mark FitzGerald, then a year and a half into his job as a semiconductor capital equipment analyst at Bank of America in San Francisco, sensed the end of the old world and the beginning of the new. As the chip industry was closing out the worst year in its history, FitzGerald saw little hope for the long-expected recovery that should be just around the corner.
Cycles in the chip business-and in the chip manufacturing equipment sector that supplies it-have always been extreme. But over two decades investors in chip stocks could always take comfort in a compound annual sales growth that averaged just below 15%.
"No more" was FitzGerald's message a year ago. The decades of predictable long-term growth punctuated by harsh boom-and-bust cycles were over. Annual sales growth of just 5% to 10% was more likely. "Back then," he says, "we were considered heretics for saying it."
Once unthinkable, FitzGerald's view is now pretty close to the conventional wisdom. Even the industry's flagship trade group, the Semiconductors Industry Association, is projecting average revenue growth of 8% to 10% in the years to come.
FitzGerald thinks that chipmakers will continue to suffer in 2003. Intel, which long preached a philosophy of spending through the downturn, will probably trim capital spending in 2003 to $3.5 billion from $4.7 billion for 2002. Advanced Micro Devices, whose founder and Chairman Walter J. Sanders coined the phrase "Real men have fabs," has plans to outsource some manufacturing in order to reduce capital costs.
Equally gloomy is FitzGerald's outlook for chip manufacturing equipment companies. Chipmakers are taking on two capital-intensive burdens at once: increasing the size of silicon wafers to 300 millimeters and decreasing the size of transistors on a chip. The cost of a new chip factory now runs about $3 billion. FitzGerald has slashed his 2003 forecast for Applied Materials from the $1.03 a share he was expecting in May to 16 cents.
There are six companies that can afford to move to 300-millimeter wafers, FitzGerald says. Of those six, two are Taiwan's contract chip manufacturers, Taiwan Semiconductor and United Microelectronics, both of which will, in his view, stand to benefit from an industry-wide increase in outsourcing. |
