Chip makers feasting on higher prices (very good article)
Tight supplies are driving up semiconductor prices and chip makers' profits
A surge in DRAM memory chip prices is squeezing profits at Dell and other PC makers, but chip makers are enjoying a windfall.
By John W. Schoen
MSNBC
Oct. 19 — After a long, bleak stretch that nearly bled some industry players to death, the semiconductor industry is in the midst of a solid rebound. Chip prices have bounced back sharply from just a few months ago, boosted by continued heavy demand for PCs, cellphones, video games, digital cameras, network switches. And given the time it takes to ramp up production, the good times are expected to roll well into next year — and beyond.
IT'S A SHARP TURNAROUND from a chip glut that as recently as this summer sent prices of some chips below the cost of making them. Benchmark 64-Megabyte DRAM memory chips, for example, have bounced from lows of $4.90 per chip in July to nearly $19 on the spot market earlier this month. While prices may have already peaked in the short-term, the outlook for the chip industry is looking strong for the next few years.
“The memory business is a feast or famine business,” said David Wu at ABN AMRO, “and we're entering a period of feast.”
The short-term price surge has already begun to squeeze profits of makers of PCs and other electronic devices. (Dell Computer Monday blamed higher memory prices for a shortfall in profits and other PC makers are expected to do the same.)
But the PC industry's pain is turning out to be the chip industry's gain. Among those enjoying the biggest windfalls are South Korea's Samsung Group and Micron Technology, Inc. the number one and number two makers of DRAMs respectively.
“Micron Technology will be a lot better this quarter than last quarter,” said Dan Niles at Robertson Stephens. “That's pretty much the case for all the chip manufacturers.”
The boom apparently extends beyond just makers of memory chips. Texas Instruments, Inc. told analysts on Tuesday that its profit margins in the latest quarter had nearly doubled from a year ago. Analysts also see gains for at Cypress Semiconductor Corp., Altera Corp., Xilinx, Inc., and Microchip Technology, Inc., among others.
As semiconductor prices have risen, Wall Street analysts have been cranking up their earnings estimates. In July, for example, Wall Street expected Micron Technology to lose 5 cents a share in the fourth, according to First Call. By mid-September, the consensus estimate had jumped to an 18-cent a share profit. This week, analysts are looking for a profit of 69 cents a share.
One standout exception is industry giant Intel Corp., which last week told Wall Street analysts that profits would be hurt by several factors, including a slower-than-expected transition to a new production technology its microprocessors.
The rebound has been a long time coming. Over the past few years, chip makers have been struggling through a period of oversupply brought on by too much capacity - which in turn brought a sharp pullback in investment in new plants. That under investment, say analysts, is one big reason the industry is now enjoying a surge in prices.
As a result, chip makers are looking forward to a very strong fourth quarter — typically when demand peaks. (That's why — even though the impact on production was relatively light — the timing of the Taiwan earthquake also had an impact on prices.) But as computer chips have become a commodity, suppliers have learned to mothball capacity or hoard their product in times of low prices — and then flood the market when prices spike. Analysts expect the recent surge in chip prices to be relatively short-lived.
“If prices go up too much, then you choke off demand. People just stop buying,” said Ken Pearlman at CIBC Oppenheimer.
The jump in prices already has chip makers moving to ramp up production again. Just this week, Macronix International Corp. — Taiwan's largest maker of the so-called flash memory used in everything from cellphones to digital cameras — said it was investing another billion dollars to build a third plant in the first quarter of 2000. Some analysts look for DRAM makers to follow suit.
“If it only cost $3 to $4 to make one of these and prices are at $20, you're going to hear a sucking sound as money goes into that market,” said Pearlman.
That increased spending is also boosting profits for suppliers of chip-making equipment like Applied Materials.
But because of the time it takes to ramp up new production, most analysts expect chips prices to remain firm for some time. Shortages are expected to crop up again in the second half of next year and beyond. S.G. Cowen & Co. analyst Drew Peck figures it will take well into 2002 before enough capacity comes on line to make up for the shortfall in investment in new plants over the past two years.
“By the time you figure out you've under invested, it's way too late,” said Niles. “If you ordered a leading edge fab[rication] plant today, it would you about 12-18 months to get it and another 6 to 12 months to ramp up production.”
That's a big reason that chip stocks have surged in the past 6 to 12 months. Some analysts think those prices still don't fully reflect the profit gains ahead.
“There still more to go,” said Niles. “We probably have another two to three years of good strong earnings growth.”
But given the volatility of chip prices, investors in chip stocks still need to keep their seat belts fastened. Prices of these stocks tend to mirror the volatility in chip prices.
“You have to have ice water in your veins,” said Peck, ” because the short term cyclicality of this business means that stock prices are all over the place.”
msnbc.com |
