Instead of the final line reading "A lot of the analysts on Wall Street have never gone through a semiconductor downturn," Niles says. , it should read "NO ANALYST has ever experienced an upturn in the semiconductor sector led by demand for chips for broadband, wireless, and the internet."
BK
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Reading the Chip-Maker Tea Leaves
By John W. Schoen
Senior Producer,
MSNBC
Is the booming computer chip market beginning to cool off? Don't look to Wall Street analysts for guidance. Those who follow the industry are sharply divided on the question. One reason may be that, as technology seeps into more and more devices, the chip industry is splintering into niche markets that march to very different drummers.
Forecasting supply and demand of computer chips used to be fairly simple. Until recently, most chips fell into one of two categories: the microprocessors that are the brains of a PC and the memory chips that store data. But today, those categories make up less than half the $34 billion chip market.
So as specialized computer chips have become the guts of more electronics devices -- from cell phones to digital cameras to Furbys -- predicting shortages and oversupply has become about as accurate as long-range weather forecasting. And that is making life much more difficult for investors in chip stocks and the companies that buy chips to make their products.
Since pulling out of a four-year slump last summer, the semiconductor industry has been scrambling to keep up with booming demand. Global semiconductor sales are expected to be up 31 percent this year to $195 billion, according to the Semiconductor Industry Association. The trade group's mid-year forecast sees that growth slowing to 25 percent next year, 14 percent in 2002 and 12 percent in 2003.
But the overall numbers mask an increasingly fragmented market, where makers of specialized chips are subject to the ups and downs of demand for the specific products they are designed for.
That may help explain Wall Street current quandary over where the semiconductor market is headed. The stocks were whipsawed last week as analysts debated the outlook for industry giants, such as Intel Corp. {INTC} and Micron Technology Inc. {MU}, with widely different views.
The confusion isn’t all that surprising. While there is agreement that the chip boom of the past year won't last, there is little consensus as to when it will end. That is one big reason Wall Street analysts send such mixed signals about chip stocks, according to Dan Niles, a semiconductor analyst at Lehman Brothers.
"If you can get it right at the beginning of the cycle, you can recommend them all, and they all go up," Niles says. "And at the end of the cycle they all go down. At the middle of the cycle is where you earn your money. That's when you have to really pick stocks."
Much of the recent worry stems from falling DRAM prices -- the memory chips used in personal computers -- and a longer-term trend of slowing sales of desktop personal computers. Demand for DRAM, long the dominant growth engine for the chip business, is driven largely by the boom and bust of PC product cycles. But the chip business has now diversified into numerous other markets; DRAMs now make up some 40 percent of all chip sales.
Further clouding the outlook is uncertainty about desktop computer sales. Although growth has slowed, PC sales typically pick up in the fall as back-to-school sales kick in and end the year with a bang with a surge in sales for Christmas. Analysts are divided on whether that pick-up will take hold as strongly this year as it has in the past.
Dell Computer Corp. {DELL}, for example, reported that sales of desktop computers last quarter slowed, while sales of higher-margin laptops and servers are growing more quickly. Desktop PCs now make up about half of Dell's sales, compared with some 60 percent a year ago. The company is sticking with projected sales gains of 30 percent for the fiscal year ending Feb. 2, bringing revenue to $33 billion.
Compaq Computer Corp. {CPQ} is seeing strong growth of servers, where revenue rose 40 percent in the second quarter, as sales of desktops slow down. And PC maker Gateway Inc. {GTW} is also seeing a bigger portion of its revenue from higher-margin, non-PC offerings, such as Internet access and training services.
Despite slower growth in PC sales, many chip makers have been enjoying a booming business due to a host of other devices that are stoking chip demand -- everything from flash memory for digital cameras to the communications chips that power network switches. And the markets for those chips are subject to the ups and downs of demand for specific product categories.
Take cell phones, for example. Last Christmas, a dearth of chips and red-hot demand for cell phones left Motorola Inc. {MOT} unable to keep up with orders. Then, earlier this year, a glut of cell phones and slower-than-expected sales undercut demand for the flash-memory chips that go into those devices. That prompted some analysts to warn that makers of flash memory will be fighting a headwind of oversupply for the next six months or so.
But last week, National Semiconductor Corp. {NSM} reported better-than-expected profits in the latest quarter, citing a turnaround in orders for chips used in cell phones. The chip maker's stock has also rebounded lately, in part because it has spread its bets across several chip niches.
"The company has a well-rounded product mix, well-diversified, end-market exposure and a broad customer base," UBS Warburg analyst Greg Mischou who recommended the stock in a research note Friday.
While demand for DRAM and flash-memory chips has eased, consumer-electronics companies have been scrambling to get chips. Many report that orders that had been taking six to eight weeks to fill are now taking as long as six months.
Some devices, like those used to make rewritable CD drives, are in such short supply that PC makers are unable to fill demand. Toy makers are also worried that chip shortages could cut into sales. For instance, Mattel Inc. {MAT} last month warned that a shortage of chips will cost the company some $100 million in lost sales in the second half of the year.
Meanwhile, chip makers serving the hot telecommunications market are marching to an entirely different drummer. These companies, such as JDS Uniphase Corp. {JDSU}, PMC-Sierra Inc. {PMCS} and Vitesse Semiconductor Corp. {VTSS}, are riding strong demand for the chips used to make the switches and other networking gear. To keep up with the rapidly expanding speed and reach of the Internet, telecom providers have spent heavily to upgrade their networks.
But no one expects that spending to continue forever. The trick is predicting when the downturn will arrive. By the time end users like the telecom industry signal a slowdown in sales, the party will already be over for the chip makers who supply them. And don't count on Wall Street analysts to see it coming.
"A lot of the analysts on Wall Street have never gone through a semiconductor downturn," Niles says.
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