Approaching peak of chip cycle unnerves investors
Friday June 11, 9:54 am ET
By Christopher Borowski and Nathan Layne
AMSTERDAM/TOKYO, June 11 (Reuters) - The chip cycle is expected to peak this year and investors are busy deciding which industry stocks to dump and which ones are worth holding onto as a possible supply glut threatens to offset strong demand.
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The industry has been red-hot in the recent months, as growing demand from computer and other makers of tech gizmos pushed chip makers to boost production, in turn benefiting the producers of machines that churn out semiconductors.
But the Philadelphia Semiconductor index (Philadelphia:^SOXX - News), which includes some of the biggest names in the sector, dropped to its year-lows in May and is still down eight percent from 2004 highs as investors fear the upswing may not last too long.
Even with semiconductor revenues expected to grow by as much as 30 percent this year, some analysts are already pointing to stocks that could suffer as the market peaks.
Earlier this week, the Semiconductor Industry Association forecast a 28.6 percent growth in chip sales this year, to be followed with only a 4.2 percent rise in 2005 and a 1 percent drop in 2006.
At the same time, Goldman Sachs downgraded the world's top two contract makers of semichips -- Taiwan Semiconductor Manufacturing Co (TSMC) (Taiwan:2330.TW - News; NYSE:TSM - News) and United Microelectronics Corp (UMC) (Taiwan:2303.TW - News; NYSE:UMC - News) -- concerned about inventory build-up and aggressive investments in new factories.
"Tightening foundry capacity utlisation and improving visbility are driving up capital spending at foundries and buffer inventory at foundry customers, both signs of a cyclical peak," Goldman analyst Donald Lu said.
SELL-OFF HAS STARTED
Some investors seem to agree, with TSMC shares down 20 percent since late April, despite reports of record monthly sales, as big investments and subsequent oversupply could lead to sharply lower chip prices and, hence, profits.
Other market watchers have warned that expectations of a much lower 2005 chip growth forecasts would also hurt chip equipment makers, as cautious chip producers could pull orders at the first sign of a slowdown.
"If demand drops, real or perceived, the equipment market boom will be over before it really got a foothold," a technology consulting firm The Information Network wrote in a report.
Ahead of the last demand peak in 2000, chip producers built up capacity only to see sales plummet, hurting prices and pushing the entire industry into its worst-ever downturn.
But not everyone is concerned that the sector will plummet into another severe decline. Some analysts say this time around the burnt producers are more cautious and should manage capacity much better into next year.
They blame the share price retreat, at least partially, on wider fears over the economic situation and spike in oil prices.
The key question is not just if the sector will over-invest, but also if the electronics industry continues the current healthy uptake of chips for computers and new products such as digital cameras, advanced mobile phones and DVD recorders.
If demand for chips remains strong, then a downturn sparked by oversupply is far off, they said.
"We think the supply side of the equation still looks benign," said Merrill Lynch semiconductor analyst Dan Heyler.
Heyler said one key indicator, capital expenditure as a percentage of sales was estimated at 21 percent, while he considered 25-30 percent to be a danger zone.
Many chip producers remain upbeat about their prospects, with industry bellwether Intel (NasdaqNM:INTC - News) raising its quarterly revenue guidance earlier this month citing better-than-expected demand for flash memory chips used in mobile phones.
Intel shares are up 11 percent since the beginning of May. |
