From TSC,
thestreet.com
Chips Ahoy! Semis a Safe Haven in
Stormy Seas
By Marcy Burstiner
Senior Writer
4/21/00 10:57 AM ET
In a turbulent economy, chips can be a
safe haven. Year to date, the
Philadelphia Semiconductor Index
has risen about 44%, compared with
the Nasdaq's near 9% drop. But these
stocks are by no means immune to
stormy weather. Since March 10, as
the Nasdaq fell some 27%, the SOX
had its own 22% drop.
Some of the chip stocks hurt the most were the ones investors
had previously loved the most: RF Micro Devices
(RFMD:Nasdaq - news - boards), which dominates the market
for the power amplifiers needed in cell phones, fell 50% between
March 10 and April 19; Broadcom (BRCM:Nasdaq - news -
boards), which owns the market for cable modem chips,
dropped 41%, and PMC-Sierra (PMCS:Nasdaq - news -
boards), a leader in networking chips, fell 42%. Still, the stocks
remained in positive territory year to date.
Investors aren't worried so much that anything is fundamentally
wrong with the companies; all indications show strong demand
for chips across the board. But investors have become
increasingly nervous about the high valuations the stocks have
commanded: Even after the falls, Broadcom trades at 302 times
trailing earnings, PMC-Sierra trades at 204 times earnings, and
RF Micro trades at 144 times trailing earnings.
Chips Sliding Away
After a big run-up, semiconductor stocks have dipped,
following the Nasdaq.
The stock that held up the best during the market collapse was
one that, this time last year, was about the most reviled in the
chip sector: Advanced Micro Devices (AMD:Nasdaq - news -
boards). The company competes against Intel (INTC:Nasdaq -
news - boards) in the PC chip market. While the rest of the
sector was tanking, AMD rose 45% on news that its high-end
Athlon chips were selling like gangbusters.
In the old days, chip investors didn't worry much about the larger
economy. Semiconductor stocks were ruled by supply. Demand
stayed fairly constant, and prices rose as supplies tightened
when companies ran out of room in their manufacturing plants.
Companies would frantically build more, supplies would rise,
and prices collapse -- and so would the stocks.
In those days, chips went into one basic thing -- computers.
Now, however, they are in just about everything: phones, cars,
light switches, toys. And if there is an economic slowdown,
consumers and companies might stop spending on these new
products. The mere fear that that could happen could spur the
makers of some products to stop ordering chips. That's what
worries SG Cowen analyst Drew Peck. "The spigots would get
turned off and orders would turn down to zero," he says.
We had a small taste of that scenario in the second half of
1998, he says, when the fear that economic problems in Asia
would spread globally caused chip manufacturers to stop their
building out of inventory -- they assumed, incorrectly it turned
out, that orders would slow.
Still, many chip investors are holding fast to their stocks. As
Mark Weiss, an analyst at Amerindo Investment Advisors
sees it, it would take a prolonged and widespread economic
downturn to affect companies that make chips for Internet
infrastructure. That's because telephone and cable companies
are rolling out digital subscriber lines and cable modem
networks now, and these companies are well-funded and don't
have to depend on continuing money flow from venture
capitalists.
These companies are in a race for subscribers. They know, he
says, that subscribers will be easier to get initially than to steal
once a competitor has signed them on. In this race, telcos will
continue their build-out of the Internet infrastructure regardless of
drops in the market, Weiss adds, and that means a continuing
need for the chips needed to run the networks. That means little
risk and much reward for companies like Broadcom, Applied
Micro Circuits (AMCC:Nasdaq - news - boards) and
PMC-Sierra. (Amerindo owns Broadcom, but not Applied Micro
or PMC-Sierra.)
"Only if the markets really got hammered in a terrible way, then
you might see some slowing," Weiss says.
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