A Slowing PC Industry May Not Slow Chipmakers
November 8, 1999 (Sorry, if this was already posted posted.) Is from Business Week Online...
In an online Q&A, ChipInvestor.com's Manoj Nadkarni says the Net is now a prime driver of chip growth
"If you are bullish on the Internet, you have to be bullish on the semiconductor industry," says Manoj Nadkarni, editor of ChipInvestor.com, an online newsletter that focuses exclusively on that industry. Nadkarni posits that more than the PC industry, the Internet, especially its infrastructure, is now the main driver of chip demand.
In an online chat hosted by Business Week Online on America Online on Nov. 4. Nadkarni gave his views of the chipmaking industry, including his thoughts on superstar Intel. He noted that Intel still relies heavily on the PC industry for its growth -- about 85% of its revenues are derived from microprocessors and chipsets. However, the company is trying to break into faster-growing businesses by acquiring networking and wireless companies. Some of these acquisitions make good sense, says Nadkarni, but others may take management's focus off of the company's main high-margin businesses.
Nadkarni also discussed the differences between buying chip manufacturers and chip equipment makers. Here's an edited version of his answers to questions from the online audience and from Business Week Online moderator Sam Jaffe. A complete transcript is available from BW Online on AOL, keyword: BW Talk.
Q: Could you give us a big-picture view of the chip industry. How has it changed in the last five years or so, and where is it headed?
A: We are seeing some fundamental changes in the chip business. During the last 20 years, the PC industry was the main driver for the growth of semiconductor businesses. Now we are seeing the Internet fueling the growth of chip companies. Demand for a variety of chips is going up because chip companies provide the necessary infrastructure for the Internet to grow. People normally associate companies like Yahoo! and eBay with Internet growth, but if you are bullish on the Internet, you have to be bullish on the semiconductor industry. The wireless revolution is another major driving force behind the semiconductor industry.
Q: What are your general feelings about Intel? Is it making the right moves? Is it a good stock to own?
A: The answer to your question is somewhat complex. First of all, Intel, like other chip companies, is benefiting from the growth of the Internet. However, the No. 1 favorable factor for Intel is the growth in PC unit shipments. The second favorable factor for the company is the strong flash memories business. Intel is also making some very good acquisitions in the networking and wireless businesses.
On the other hand, Intel is seeing good competition from Advanced Micro Devices, and it is seeing pricing pressure on high-end desktop chips. Secondly, we think Intel is getting into some lower-margin businesses, which may also take away management focus [from its core higher-margin areas]. So there are some very positive factors, and then there are some areas that concern us.
Q: Intel has bought seven companies in the past two years for about $4 billion. You mentioned that you like what they've bought, but do you agree with the idea of them branching out into other chip sectors? Might they be better served by maintaining their dominance in something everyone knows they do well -- making chips for PCs?
A: Yes, Intel is really a microprocessor company. About 85% of their revenues come from microprocessors and chipsets. Everything else they do should help them sell more microprocessors. Some of their acquisitions are good, like Level One Communications and DSP Communications. With these companies they are well positioned to bring out new networking chips. However, we are concerned with Intel's entry into the Web-hosting business because demand for these types of services is fairly elastic.
Q: What do you think of Xilinx?
A: It is a very good company, but we do not follow Xilinx in that much detail. We follow a disciplined approach in which we look for very specific criteria. We look at the valuations, financial ratios, and growth prospects for a company. We have a variety of screens that encompass about 40 or 50 different criteria. If a company doesn't meet all those criteria, we don't dig into it.
Q: What are your thoughts on LSI?
A: It, too, is benefiting from the growth in the Internet. LSI is what I would consider a medium-sized IDM [integrated device manufacturer]. The companies of this size, in our opinion, cannot get the economies of scale in manufacturing like Intel or Texas Instruments can get. What we find as a result is that many of these small and mid-sized IDMs will not meet our financial ratios criteria.
Q: What do you think of Applied Materials?
A: It probably one of the best-run equipment companies. Applied Materials is the leader in etch deposition equipment. It has been very successful in leveraging its leadership in one tool type to sell other types of tools. During the past year, the company has gained market share so that Applied Materials now has about 30% of the total equipment market. Its market share may not go up, but the pie will get bigger. We also expect Applied Materials to come up with new applications.
Q: Can you explain the difference in buying a chip manufacturer versus a chip equipment maker? How should one expect them to behave differently in a portfolio, and is there a different time to be a buyer of one type or the other? Is there a different cycle for both types of stocks?
A: Certainly. Chip companies are benefiting from the growth in networking communications and PC businesses. Therefore, as the demand for chips goes up, chip companies want to build new plants. Typically, it takes anywhere from one to three years to bring up a new plant or expand existing capacity so the dynamics of the chip companies businesses versus equipment companies are different.
For example, DRAM prices are a good indicator of when chip manufacturers are looking to expand capacity. When the prices go up, companies start building new plants and buying more equipment, and that helps equipment companies' businesses. When the prices are down, there is less expansion activity, and accordingly, the equipment businesses slow down. So the equipment cycle is dependent on the demand for chips.
Q: Any comments on Rambus? I would specifically like to hear your opinion on when RDRAM [a kind of new high-speed random-access memory Rambus is designing] will appear and will it be successful?
A: We do not follow Rambus that closely, but we follow Intel. It has been our position for several months now that Intel should support all types of memories because Intel is mainly in the business of selling microprocessors. If their customers prefer other types of memories, then Intel needs to support them. We are happy to see that Intel is taking that position and that they are coming out with chipsets supporting PC 133 [another type of high-speed DRAM]. We think RDRAM will be one of the different memory standards used by PC makers, and ultimately the market will determine how different types of memories will be successful. |
