more of their reasoning:
WATCH BOTH THE TOP-DOWN AND BOTTOMS-UP INDICATORS
In trying to understand the semiconductor cycle, we look at both top-down indicators,
mostly macroeconomic data like shipment growth rates and capital spending, and we also do
a reality check on bottoms-up indicators, microeconomic inputs like lead times, prices and
inventories. For most of this year, we have become increasingly concerned about the top-down
picture, but have been reassured the upcycle was intact as lead times continued to
extend, prices firmed, and inventories remained low. The bottoms-up picture, however, went
cautionary recently, apparently brought on by a slight slowing in cellular phone growth
expectations and the rapid increase in capacity. We do not believe normal summer slowing is
the culprit.
TOP DOWN STORY HAS BEEN WEAKENING IN THE LAST SEVERAL MONTHS
Capital spending growth should set peak this year. Peak years in capital spending
closely correlate with peak years in semiconductor growth. We believe strongly that
semiconductor cycles are mostly defined by excess capacity rather than by a fall-off in
demand, particularly in economic boom of the 1990s. The only demand-induced
slowdowns in the last 20 years were in 1985 (declining PC market) and 1997 (Asian
financial crisis). In the past, peak years in capital spending have correlated closely with
2
peak years in semiconductor shipment growth. Those years were 1984 (64% growth of
capital spending), 1988 (53%), 1995 (71%), and a short peak in 1997 (32%). We started
2000 with a forecast of 35% capital spending growth, which was revised upward to the
point that we are now anticipating 60% capital spending growth. Industry data from
SEMI, which shows equipment shipments up about 75% for the first six months of the
year, easily supports our capex forecast. We are currently forecasting 35% capex growth
for the industry next year. That estimate may be low, but it is unlikely that capex will
grow greater than 60%, which means this year is the peak.
Semiconductor and WW Wafer Fab Equipment Year-over-Year Shipment Growth
Unit growth apparently rolling over after setting record high. Unit growth reached
an all-time high in February at 34%, and has fallen three months in a row to 30% in May
(the latest data available). The peak achieved several months ago correlates highly with
peaks set in 1988 (26%), 1995 (29%), and 1997 (26%), all of which preceded
semiconductor industry slowdowns. Only once in the last 15 years has a 4-month decline
reversed into another uptrend with the sector going on to set a new peak. That was in the
3
fall of 1986, when the interim peak reached 20% growth. This was far from the
overheated 34% pace set in February, which as we said, appears to have been an all-time
high.
Shipments likely to continue accelerating for the next couple of quarters. Despite
the peak unit shipment rate, 40% yoy growth in shipments is not an all-time record level.
In fact, in the last 15 years semiconductors have grown faster than 40% about 8% of the
time (on a monthly basis). In addition, two of the most important sectors—
microprocessors and DRAM—have lagged and are only now playing catch-up. For this
reason, we could still see some acceleration in SIA shipments for the next several
months. Analog, discretes, and logic are currently all at, or in analog’s case, significantly
above, previous peaks.
Two contrary indicators: utilization and capex as a percent of sales. Some analysts
believe high utilization rates and capital spending below a certain percent of revenues
(ten years ago, the benchmark was 20%; now it is 25%) are positive indicators of an
uptrend. We believe these are two indicators are helpful, but only in a contrary way. A
look at utilization rates over the last 15 years show that rates peak out when the sector
peaks out, which makes plenty of sense. SECA estimates utilization rates for 8-inch
wafers is currently running about 99%. We have also found that capital spending as a
percent of sales, just as capital spending is in general, is a lagging indicator of the health
of a sector. Usually, by the time capex rates achieve high levels, the stocks have already
begun to decline.
BOTTOMS UP INDICATORS HAVE TURNED NEGATIVE IN THE LAST COUPLE OF WEEKS.
Some lead times beginning to come in. Lead times are a hard number to gather.
Dataquest publishes some numbers, but they tend to be late. We watch a diffusion index
published by one of the trade magazines, which is helpful. Probably the most important
indicator is industry anecdote. Up to the last few weeks, lead times in the industry have
been moving out. In two product areas—capacitors and Flash—they have extended out to
12 to 18 months. That is not a lead time, but a pipe dream. We believe lead times for
some components—like power amplifiers going into cellular phones, and perhaps even
DSPs—have shown recent signs of coming in. This is probably the result of cell phone
growth expectations coming down moderately in the past month, or so. In addition, lead
times in tantalum capacitors are coming in, we believe, while availability is improving in
Flash memory, also indicating lead times are coming in. Fortunately, except for a few
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extreme cases, lead times are not as extended currently as they were in 1995, which
suggests to us the correction will be more mild than previously.
Some commodity prices coming in. Overall, we continue to see flat to modestly
positive price trends in much of the industry. However, in several key areas—capacitors
and Flash—prices have begun to moderate in the spot market, though not yet in the
contract market. Though seemingly disconnected with the rest of the industry, these two
product areas are important because they are the most extreme, and we would expect will
show the first signs of reversal. For the first time in over a year, we have begun to see
spot market brokers indicate lower prices for some Flash products. One well known
broker last week reduced prices on 1Mb parts from $8.60 to $8.30 and 8Mbs from $14.50
to $13.50. In addition, tantalum capacitor prices have come off sharply in the spot
market, with some parts being market down from $1.00 to $0.65, and lower, in recent
weeks.
Inventories rising at semiconductor companies and contract manufacturers. Despite
reports of rampant component shortages and supply tightness proliferating throughout the
industry, inventories somehow have begun to build both within semiconductor companies
and to a limited degree, selected customers. In fact, a similar phenomemnon unfolded in
the previous peaks of 1997 and 1994/1995, where the median days of inventories of our
group also reached peak levels. Similarly, days of inventory are also increasing at
contract manufacturers, reversing the trend of computer, communications equipment, and
distribution companies.
Days of Inventory
Communications Computing ContractManufacturers Distribution
PEAK YEARS ARE NOT VERY GOOD YEARS FOR THE STOCKS
Going back nearly 40 years, semiconductor stock performance has shown one major trend in
peak years: the group has underperformed the DJIA and the S&P500 during the year. Peak
years in which the group (going back 40 years, it was made up of Motorola, Texas
Instruments, and later, National Semi, Intel, and Advanced Micro) included 1981 (semis
down 41%, indexes down 10%), 1985 (semis up 1%, indexes up 27%), 1988 (-18% versus
12%), 1995 (9% versus 34%), and some would consider 1997 (3% versus 27%). Obviously,
this more than a high beta at work. In addition, the pre-peak years tended to be huge years of
outperformance. Needless to say, relative and absolute valuations for the group currently are
near all-time highs.
1985
Jul- 90
Jul- 91
Price- Book/ Price- Sales |
