From Bear Stearns report on semi conductor industry (swiped from YooHoo):
Here are the key points of the Bear Stearn Research Report on the Semiconductor Industry, dated Aug. 9/00
Key Points
*** The sharp correction in chip stocks over the past few weeks (25% since the
SOX index recent high in mid-July) is overdone in our opinion. The
industry remains fundamentally strong, and the slower growth in wireless
handsets is more than adequately discounted in the stocks. We believe
investors should begin to buy semiconductor stocks now in front of a
likely second half rally.
*** We have completed a comprehensive survey of chip company management and
industry contacts. We see no evidence of fundamental weakness in the
overall semiconductor industry. Bookings continue to grow, lead times and
prices continue to firm, indicating that semiconductor supply is
tightening. We expect strong sequential revenue and earnings growth in the
second half of 2000.
*** The wireless handset market has experienced a slowdown relative to
aggressive expectations earlier in the year. We believe this has freed up
a small amount of flash memory inventory from cell phone OEMs, which is
being absorbed in an orderly way by the rest of the market. The cell phone
market is unlikely to experience extended weakness, and is too small to
derail the chip cycle in our view.
*** Rising commodity prices are driving accelerating industry revenue growth.
The June WSTS Global Billings Report showed revenue growth up by 48% on a
year-to-year basis, and we believe the comparisons will exceed 50% over
the next few months. We are boosting our industry growth estimates to 40%
for 2000, and 45% for 2001.
*** We believe the chip stocks are discounting the risk of a near-term
cyclical peak, which we believe is highly unlikely. We think a cyclical
peak is unlikely to occur before the end of 2001. As investors regain
confidence in the fundamental strength in the chip industry over the next
few weeks, we believe the stocks are likely to undergo a significant rally.
PEAK IN CAPACITY CYCLE FAR OFF
Given the fanatical fixation on the cell-phone market in recent weeks, we think
it is useful to step back and survey the broader picture in the industry.
Capacity cycles usually peak because of a combination of overspending on
capacity, excess inventory due to double ordering, and overly optimistic demand
forecasts. The most important of these factors in our opinion is the buildup of
excess wafer capacity, a consequence of aggressive capital spending during the
expansion cycle. Capital spending is in fact expected to grow by about 60% this
year, a significant amount. However, this aggressive spending growth should be
viewed in the context of being the first year of substantial capital spending
growth after 4 consecutive years of little or negative growth.
We believe the semiconductor industry today is faced with serious supply
shortages of many components, and the near term outlook is not encouraging.
Companies are investing aggressively in wafer capacity to correct the current
supply deficiencies. The rate of capacity growth in the near term will be
limited by semiconductor equipment companies' ability to ship equipment, which
is evident today by lengthening equipment lead times. We do not believe the
semiconductor industry can build capacity fast enough to cause the cycle to
peak while demand is healthy. In our view, it would take an unexpected downturn
in demand to cause the industry cycle to peak prematurely, which we think is
very unlikely. While we have the utmost confidence in the chip industry's
ability to over invest and plunge itself into another cyclical downturn, we
believe that point is unlikely to occur before the end of 2001, and could occur
even later.
IMPACT OF THE WIRELESS HANDSET MARKET
The catalyst for the risk of a premature peak in the semiconductor cycle has
been the wireless handset market, which has undergone a radical transition in
perception from a source of unbridled growth to a demand inhibitor, possibly
capable of triggering a broad correction in the overall semiconductor market.
We believe this risk is significantly overblown. First, we do not believe the
wireless handset market has weakened substantially - rather, we think the
aggressive upside expectations to the nominal handset unit estimates of about
425 million units for 2000 have been essentially eliminated. We believe that
the wireless handset market is on track to grow by about 60% in 2000 to about
425 million units, and estimate will grow by 30-35% in 2001 to 550-575 million
total units.
Second, we do not believe the wireless handset market is large enough to cause
the semiconductor supply tightness to reverse itself. A 425 million unit
handset market with an average semiconductor content of about $40-$45 per
handset (our estimate) represents about 8-9% of the total semiconductor market
in 2000 on a revenue basis, significantly smaller than the PC market in 1995,
which exceeded 40% of the total semiconductor market and directly contributed
to the last peak in the capacity cycle.
We do think that some wireless handset OEMs likely accumulated inventory of
flash memory and capacitors, the 2 most difficult components to procure, in
anticipation of upside to the nominal handset unit forecasts. It is likely that
some of this inventory is being liquidated as a result of the adjustment in
handset unit expectations back to the nominal industry estimates. However, the
relatively small size of the wireless handset market and the strong demand for
these products across the rest of the industry should allow whatever modest
inventory liquidation occurs from the cellular handset vendors to be absorbed
in an orderly fashion without causing a sudden shift from supply shortage to
supply glut.
CHANNEL CHECKS ARE UNIFORMLY POSITIVE
We have spoken to a number of industry sources and many different semiconductor
management teams in the last week. We see virtually no evidence of eroding
fundamentals in the industry, and continue to see abundant evidence of ongoing
supply shortages. Semiconductor categories that are experiencing strong growth
and tightening supply include analog components, microcontrollers, DSPs, ASICs,
standard logic, SRAM, and DRAM. The distribution channel reports more products
going on allocation, and increasing expedite activity to find product for
customers.
Growth in the broadband infrastructure and optical network and switching
markets remains very strong, and current growth estimates may be conservative.
Enterprise LAN growth appears to be strengthening as Gigabit Ethernet
deployments accelerate. The growth in Internet and e-business networks is very
strong, driving demand for servers, storage systems, and networking equipment.
The PC market is showing signs of normal seasonal strength as we move toward
the fall and winter selling seasons. Digital consumer products and information
appliances are adding to demand, and economically sensitive baseline sectors
like industrial and automotive remain very healthy.
We believe demand for semiconductors remains strong, and component availability
is a growing concern for most OEMs and contract manufacturers. Our primary
research supports this outlook, and we see little near term risk from either
the supply or demand standpoint that threatens this outlook.
First Call Corporation, a Thomson Financial company.
All rights reserved. 888.558.2500
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