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STOCKS ANALYSIS
Jul 5 2000 3:02PM ET More on Industry Focus...
Analysts: Too Early to Cash in on Chips
by Eric C. Fleming
Stocks Reporter
Semiconductor stocks took it on the chin Wednesday after a Salomon Smith Barney report hinted that the best was behind the sector. However, other analysts found the conclusion a bit on the premature side.
Salomon Smith Barney analyst Jonathan Joseph cut his ratings on Advanced Micro Devices Inc. {AMD}, National Semiconductor Corp. {NSM}, Texas Instruments Inc. {TXN} and Silicon Storage Technology Inc. {SSTI}. AMD (a microprocessor maker and Intel Corp. {INTC} rival) and TI were lowered to "outperform" from "buy" and SSTI was dropped to "neutral" from "buy."
The evidence isn't there, say analysts.
"(Joseph is) making a broad-based technical call, based upon weak fundamental evidence," says Karl Motey, who covers SSTI as managing director at C.E. Unterberg Towbin. Motey has a "strong buy" rating and 12-month price target at $125 on SSTI.
Here's the rundown on Joseph's report: The Salomon Smith Barney analyst cut TXN because of its valuation and on worries that its exposure to cell phones as sales of handsets slow. AMD and NSM were cut because of their exposure to the flash memory market, chips used in hand-held devices and cell phones to store data when the power is turned off. Silicon Storage is a victim of its own success, passing Joseph's $105 price target, and for its exposure to the flash market.
Being Early and Being Wrong
In a market where analysts move in groups, Joseph seems to be standing alone, with his colleagues calling his report's conclusions "ridiculous" and "insane."
"Though a slowdown in the group may take six to nine months, we see "first mover" evidence of a trend reversal," says Joseph in the report, who expressed concern about inventories rising and capital spending decreasing in the sector.
US Bancorp.'s Ashok Kumar says making a call that far out makes no sense. "Being early and being wrong can have a similar investment profile," says Kumar, who sees smooth sailing for the memory market for the next three or four quarters. "They are premature to make that call."
Joseph may not have enough information, as well, says Motey.
One plank in Joseph's platform to cut the sector -- that commodity chip prices are falling -- has some holes, says Motey. In Joseph's report, he cites a drop in tantalum capacitors as evidence for prices coming in. There's a simple reason why prices are falling - people don't want products that burst into flame when used.
"Tantalum capacitors are being designed out of certain systems because they catch fire -- it would make sense for the availability of tantalum capacitors to be improving."
Roth wasn't certain that tantalums caught fire, but said that the price drop may not be significant.
The memory chip market is a commodity market, so any signs that costs and prices of the chips may be affected send a shiver through investors as a surprise frost would to the orange juice futures market.
Joseph cited a dip in spot prices in capacitors, a part used in memory chips, as a sign of a trend downward. That doesn't fly, says Eric Roth, analyst at Thomas Weisul Partners LLC.
"A day-to-day fluctuation in the spot market may not mean anything," says Roth, who was among a consensus of analysts that saw no signs of lead times or prices coming in for memory chips. Roth says that only long-term trends in spot prices matter.
Cell Phone Sales Not a Big Concern
While Wall Street has a close eye on a dip in demand, calling a slowdown in cell phone sales also may be a bit premature, analysts say.
Cellular phone sales have exploded in the past several years, as networks are being built and pricing has allowed more users to buy handsets. Cell phones use memory chips and DSPs to store phone lists, calendars and Web addresses, making the growth of handset sales a variable in the health of those markets. In recent months, a concern that this boom time may be reaching a zenith has crept into Wall Street, with Joseph seeing growth expectations getting a little ahead of itself.
Others don't see much cause for alarm.
For one, demand for cell phones is healthy, says Kumar. The growth of cell phone sales and other devices and their need to handle more functions, like Web access, will keep supply and demand in balance for the time being, says Kumar.
Motey concurred that it's too early to worry. "We're certainly concerned (about cell phone growth), but it's premature (to call a slowdown)," says Motey.
Roth saw the possible buildup in flash chips as a boon to the cell phone market, since supply of flash chips had bottlenecked handset production in the past.
Joseph said in his report that he may "fine tune" his estimate of 435 million handsets to be sold this year - in either direction over the next month. Those numbers sounds good to Joseph's peers.
"At the end of the day, we are looking 425 million units in a year -- 80 percent growth - it's still a robust year-on-year growth, says Motey.
The second half is far from gloomy so far, analysts say.
"The second-half looks very strong," adds Kumar, with the caveat that "nobody knows what's going to happen next week let alone next quarter."
"I think we have another leg of the uptrend to go, it's possible we are going see a really strong year," adds Roth, who expects a strong second half for personal computers, and expects 425 million handsets, though he called the estimate "really conservative."
Joseph may not be off his rocker on valuation of the stocks, though.
On valuation, Kumar concurs with Joseph that some of the stocks may be a bit top-heavy.
Prior to Joseph's change of heart, everything was coming up roses for Silicon Storage.
SSTI, TXN, AMD, AMD Comparison Chart
In June, the company announced a three-for-one stock split after the stock had climbed about 100 percent from a year ago. Also, the memory chipmaker plans to top second-quarter expectations. |
