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Technology Stocks : Atmel - the trend is about to change -- Ignore unavailable to you. Want to Upgrade?

To: John McDonald who wrote (11495)	8/14/2000 3:38:50 PM
From: tech101	Respond to of 13565

The Whole Concept of a Chip Cyclic Is a Relic of the Past --Drew Peck of SG Cowen Business Week, Aug. 21-28 Issue: Commentary: Semiconductors: Fewer Thrills and Chills? Since its inception four decades ago, the semiconductor industry has never been able to defy business cycles that swing wildly between boom and bust. Even though chip sales have climbed at a steady 17% compound rate since 1959, manufacturing capacity has grown in fits and starts, always lagging behind or horribly exceeding demand. The current doozy of a boom, which dates back to late 1998, is no exception. With demand still skyrocketing, analysts are projecting a 77% industrywide profit surge this year, according to Thompson/First Call. Moreover, until a few weeks ago, most everyone on Wall Street assumed that the good times would last until 2002. That's when they figured chip capacity would again outpace demand and prices would plummet. The near-term indications were certainly upbeat. All manner of chips were in severe shortage and prices were holding firm or trending up. Meanwhile, the Philadelphia Semiconductor Stock Index jumped 68% between Jan. 1 and early July. MORE DIVERSITY. Then the bombs started falling. On July 5, two Salomon Smith Barney chip analysts cautioned that the industry could peak as soon as six months from now. Among the warning signs: creeping inventory levels, scattered price declines, and shorter waits to obtain some parts. Though rival Wall Street firms fired back with counter-arguments, semi stocks went into a funk. It didn't help that some analysts said cell-phone makers such as Nokia (NOK) and Motorola (MOT), who gobble up about 8% of all semiconductors, could miss their 2000 sales projections by about 10%. The Philly index has dropped 20% in the past month as investors raced for the doors. ''This is a cyclical industry, and nobody wants to be the last one out,'' says analyst Eric M. Ross of brokerage Thomas Weisel Partners. But investors who bailed out of chips may be missing huge opportunities. The usual signals that investors watch to determine the end of the boom are no longer as telling. Why? The industry is no longer as monolithic as it was five years ago, when parts used in PCs set the pace. The business has become far more diversified. Now it derives most of its growth from new markets such as Internet equipment and consumer electronics--everything from data switches and cell phones to digital cameras and DVD players. Already, soaring demand for such products is smoothing the ride on the semiconductor roller coaster. Indeed, ''the whole concept of a chip cycle is a relic of the past,'' argues analyst Drew Peck of SG Cowen Securities Corp. ''It no longer makes sense to tar the whole industry with the same brush.'' SPECIALTY CHIPS. The numbers bear him out. According to the Semiconductor Industry Assn., microprocessors and dynamic memory chips amounted to 38% of all semiconductor revenues in 1995. But by 2003, they'll represent just 29% of a much larger business. Meanwhile, other categories, such as specialty chips used in communication products and optical parts that speed the Net backbone, are growing far faster. ''New products and applications all over the world are driving demand for chips,'' says James Morgan, CEO of Applied Materials, the No. 1 seller of chipmaking equipment, which reported a 135% jump in quarterly profits on Aug. 9. That's why most analysts are still bullish on a range of chipmakers. Among the favorites: Texas Instruments (TXN), National Semiconductor (NSM), and Analog Devices (ADI), all of which specialize in non-PC chips. Which is not to say supply and demand won't get out of whack again. After three years of chronic underinvestment since the last glut, chipmakers are pumping up production capacity this year at a record rate. Capital spending on new plants will grow by upwards of 65% in 2000, to more than $50 billion. But until capacity catches up to demand--which could be another 18 to 24 months--investors have time to profit. Weisel's Ross figures the best performers could see 80% stock appreciation. That's a boom worth riding. By Andy Reinhardt Reinhardt covers chips from Silicon Valley.