News Alert from Money Talks via Quote.com
Headline: Chip, Chip Away!
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by John Tompkins
The semiconductor industry -- three years dying-- is breathing again. It's
been wheezing, and stirring for a few months, yet many mutual funds still
won't go near the patient. But the third quarter earnings of Intel Corp.
(NASDAQ:INTC), biggest chipmaker in the world, caught the bears short.
Analysts figured Intel would report 80 cents a share, off nine cents from
the same quarter last year. But, sources close to the company implied a
more optimistic "whisper number" of 84 cents a share.
And then-- Surprise! Surprise! Intel reported 89 cents a share, a penny
over the third quarter of 1997.
A week earlier, Advanced Micro Devices (NYSE:AMD), Intel's main
competitor, also sandbagged the bears by reporting a one-cent-a-share
profit for the quarter instead of a loss. Last month the loss was
expected to be 22 cents a share. Then, a few weeks ago, the Street decided
it would be a loss of 13 cents. A week later the guessing was down to 11
cents. Finally, there were "whispers" of a break-even. Still, some nay
sayers are unimpressed, For example, Prudential Securities' technology
analyst Hans C. Mosesmann revised estimates of AMD's 1999 earnings down
from 90 cents a share to 60 cents because of likely higher R&D costs.
Other chip watchers are warily optimistic. Mark Edelstone at Morgan
Stanley Dean Witter thinks the industry "has seen a bottom." And Paine
Webber's John Lazlo agrees, expecting flat or slightly better earnings for
the quarter. Intel and AMD are not a proxy for the semiconductor
industry. Many of the chipsters have not yet reported third quarter
results, while others are still down to flat, but looking good enough for
pundits to find the nascent recovery surprising.
Vitesse Semiconductor Corp. (NASDAQ:VTSS) reported 21 cents per share
compared with 13 cents for the like period of 1997. Novellus Systems Inc.
(NASDAQ:NVLS) earned 22 cents a share, nearly twice Wall Street's
estimate of 12 cents. Cree Research, Inc. (NASDAQ:CREE) came in with
earnings 102% above the third quarter of last year. To be sure, there are
exceptions: LSI Logic Corp. (NYSE LSI), badly hurt by weak sales in Asia,
says it would lay off 1,200 workers. Cabot Corp. (NYSE:CBT), supplier of
raw materials to the industry, says it's expanding production facilities.
They've heard voice-overs giving the same net addresses, The annoyance
factor has been considerable for people shut out of the "dot com" world.
Lower and lower computer prices and machines that offer real user friendly
internet access will continue to move the chip business. Aside from its
cool blue-green appearance, one of the top attractions of Apple's (NASDAQ:AAPL)
best selling iMAC (for internet Macintosh) is that it's thoughtfully
designed to make net access extremely easy.
The other side of the low-priced computer coin is that the sub-$1,000
machines use cheaper chips which is a negative for the bottom line of such
companies as Intel. At the same time, the use of semiconductors in
digital cable, DVD players, digital TV, cable data modems, digital
cameras, video game machines and other non-consumer products is
escalating.
At some point, out-of-favor stocks become so cheap they're too good to
pass up. Last week, John Lazlo of PaineWebber officially began covering
two specialized chip makers: Altera (NASDAQ:ALTR) and Xilinx (NASDAQ:XLNX)
. He rates both stocks as "Buy," and both rose sharply in price
within a few days of his recommendation. Altera is the leading producer
of programmable logic devices with about one-third of the market.
Two-thirds of its product is sold for use in communications gear. Lazlo
projects a 23% rise in earnings per share next year and has a price target
of 48. When Lazlo dubbed it a Buy it was 31. Altera is now selling
around 39.
Xilinx is the biggest maker of field programmable gate arrays. Its
main product line is aimed at high-volume low-cost applications in
consumer, automotive and PC markets. A newer line of chips is aimed at
high-density, high performance users. Xilinx does not fabricate silicon
wafers but buys most of them from Japan and builds its chips on them.
Though Lazlo expects slightly lower earnings per share in the first
quarter of 1999, he recommended it at 32 with a price target of 48. Its
current price is 41. Both cases demonstrate that investors decided rather
quickly that the chip business is to longer dying.
Periodically, some expert proclaims that the end is near for the
semiconductor industry because the ability to make ever smaller, faster,
cheaper transistors and pile them into ever-tighter layers on a chip is
running into the laws of physics. It's said that the ability to keep
doing this will hit its limit fairly soon. Maybe. But it sort of reminds
us of predictions going back a century or more ignore that the world would
soon run out of crude oil. For example, if you look back you'll find that
the end of crude should have happened around World War I. But, every
decade or so the time limit got pushed ahead. No one bothered to explain
that "running out of oil" means running out of oil that can be
economically produced at the prevailing prices when the forecast was made.
Hike the price a bit and the proven reserves of crude magically expand.
We think that's likely to be the case with transistors and chips.
We're close to the smaller, faster, cheaper limit now. But at higher
prices -- perhaps much higher prices -- the limit will likely fade away. |
