i'm not a big fan of predictions. there have been a few this week i've read that seemed incredibly confident considering the variety of factors affecting the market and they were by and large proven wrong. i will say however that people who bought amat at any price this week probably got themselves a short term bargin and a long term steal. the stock is 40% lower than when I sold it, having held on a year, and has corrected three times as heavily as the average for large cap stock and twice as heavily as large cap tech stocks. of course amat has exposed to all manner of potential ills, but it is hard to see how all of them together justify the stock's relative decline. also the stock still has in front of it an event that will cause a re-evaluation of the tech sector as a whole. the nov. 20th earning report.
I have opinioned before that I can see no reason, given earnings already posted by NVLS, KLAC and others that AMAT - a company that is probably growing its market share at the expense of all its major competitors - shouldn't report "blow out earnings." i would not be surprised if they beat the most optimistic "street" estimates by 15%. the conference call is a more dicey matter. i would assume that the turmoil in asia will be a 'cause of concern, as will dram pricing. however i doubt either is significant enough to seriously effect the overall bullishness of the long term view.
I have read elegant and impassioned views of the current state of play regarding both of these issues and have come to the following conclusion for myself. the bears and the sceptics (big bucks, dave dihllion etc) are of course correct dram prices are falling, and the increase in interest rates in asia will cause Fabs re-evaluate the cost of capital, and might in some circumstances delay capital spending... however in this new world order Fabs are now top of every developing nations strategic wish list... and new and bigger and better Fabs are being built in Europe, Eastern Europe, South America, India, Israel, Asia, and South Africa - in fact anywhere that there is an educated, low-wage workforce, and low enviromental controls. These Fabs are being built by companies and govenments committed to remaining on the cutting edge of technology, because uses for an out of date Fab are hard to find.
So i guess what i'm saying is that this demand is increasing and pretty inelastic... You see most new Fabs are built with govenment subsidy, and most companies will chose to get the subsidies offered by the current administration and build now, rather that wait to see if they are still available under another regime... Of course there could be quite devestating long term problems if this non-market driven construction continues... a parrallel might be seen in the late 70's global steel industry... but that is a problem perhaps in 2005, certainly not now.
As for dram price pressure, i have come to the conclusion that this is in fact a bull argument. Prices are falling, not because there is a shortage of demand for memory, but because there is so much demand for memory that economies of scale enable lower prices. we have here in fact perhaps the purest example of Greenspan's new economics. supply and demand find equilibrium at lower prices because production is so efficiant and free of monopoly that fabs can only maximize profit by maintaining or increasing market share. which of course explains why fabs are presently running close to capacity, yet cannot stabilize prices.
MU really illustrates the bull argument well. it is in trouble because it has an aging product line that it has to discount, not because there would not be demand at a higher price point if it had a more current product. what is it going to do, keep producing chips nobody wants or leapfrog the competition by producing a chip for which there will be a demand, and that it can sell at a profit. obviously to accomplish this it will have to buy capital equipment... AMAT is a formost maker of a great deal of this equipment.
I write this piece to tell anybody that is interested that I have decided that at these levels I am bullish, and will add to my position next week... While I refuse to make predictions of next week because I have no idea what external factors will prey on the market, I think its a good bet that the stock will be significantly higher on November 21st than it is today. I think that november 37.5 calls represent great value because on confermation of the story the stock will move imediatley because the fear surrounding it will evaoprate, and this is therefore my chosen method to play the stock and the forthcomming events.
I hope this is useful whichever place relative to the fence you sit. |
