Semiconductors: Morgan Says Buy Chips on Dips, Gives Ten "Bulletproof" Picks
Miami, FL, October 23 /SHfn/ -- As the dust settles from a wildfire selloff of the tech sector, technology research analyst Dan
Morgan of Noble Financial Group believes the time to buy chip stocks is now. Last month, a warning by Intel [INTC] on third-quarter
sales projections shot and killed the stock, prompting nervous investors and fund managers to declare open season on selling chip
stocks. The bad news trimmed one-quarter of Intel's market value overnight, and knocked the socks off the Philadelphia
Semiconductor Index. The benchmark semiconductor index eroded more than 40% between September 1 and October 18. Earlier in
the summer, Morgan shrugged off the prevailing negative chip outlook on the Street, and the SOX rallied more than 20% in the two
weeks following an interview with StockHouse. While the doomsayers glumly await the end of high times, Morgan said in a
follow-up interview last week that all the bad news has been factored into many chip stocks, and now is the time to buy Intel and
some specialty chip-makers.
That is not to say that the concerns shrouding the chip markets are unfounded. Ashok Kumar of U.S. Bancorp Piper Jaffray warned
that Intel's numbers would be light. Unfortunately, the chip giant proved him right last month when warning that sales wouldn't hit the
expected growth rate because of weakness in European demand. A negative outlook on the upcoming fourth quarter from chip
equipment testing firm Teradyne [TER] gave fuel to the negative camp, says Morgan, as did a statement by Cypress
Semiconductor [CY] that key customers Lucent [LU], Intel and Motorola [MOT] were to blame for weakness in upcoming
quarters. Global chip sales were up 53% in August, and a book-to-bill ratio of 1.24 indicates that
Admittedly a hard-core bull, Morgan supports his case against the bears with cold and hard facts.
First, he counters some Street pundits by asserting that we have not seen the peak of the
semiconductor cycle. Global chip sales were up 53% in August, and a book-to-bill ratio of 1.24
indicates that demand is still healthily outstripping supply. Morgan says that the semiconductor
industry is on target to exceed Dataquest's revenue projection of $231.6 billion in 2000, marking a
37% year-over-year jump. Dataquest predicts growth will slow to low double-digits, around 13.9% in 2002, before a moderate cyclical
slowdown occurs in 2003.
So why the mass panic on the Street? Morgan says, "A lot of analysts are looking at more cyclical commodity-based segments in
the chip industry and have seen some sloppiness in those groups. And (they) are then pointing to that as an across-the-board peak
slowdown." That's precisely what happened when prices for dynamic random access memory (DRAM) chips, which constituted the
majority of overall chip sales, fell through the floor in 1996. Morgan explains that the impending cyclical slowdown will not be as
sharp and steep as it was in 1996, because the microprocessors and DRAM that serve the PC market account for only half of overall
chip sales. The other 50% comes from newer specialty chips used in communications technology. Morgan says he won't sound the
alarm until he starts to see the leading producers of communications chips such as programmable logic devices (PLDs) and digital
signal processors (DSPs) begin to divulge weakness.
At this juncture, the outlook remains positive for specialty semiconductor makers in the PLD space.
However, the share-price action of Xilinx [XLNX] and Altera [ALTR], the number-one and
number-two players in that space, belies this picture of health. In the second week of October, both
XLNX and ALTR lost about 40% of their market caps, when Salomon Smith Barney, Lehman Brothers
and Prudential dropped their ratings on the stocks. Morgan was shocked by their dramatic falloff,
because he observed no lowered guidance in either company's growth projections. Altera and Xilinx
are seeking 16% and 20% sequential growth, respectively, yet their shares were knocked 50% off
their 52-week highs on negative comments.
Morgan postulates that the pressure on the stocks was exacerbated by negative guidance from Cypress Semiconductor, and by
concern shrouding the telecommunications segment. "I think people somehow see that 70% of revenues coming from
telecommunications, and they automatically assume that you have some tie to the mobile phone business," says Morgan. He
believes that last week's strong numbers and upward guidance from Nokia [NOK] are alleviating some handset worries.
Nonetheless, he thinks XLNX and ALTR should inform investors that their main telecom customers are networking and Internet
build-out players like Cisco [CSCO] and Nortel [NT].
Morgan is most bullish on XLNX and ALTR, and he mentioned Actel [ACTL] and Lattice Semiconductor [LSCC] as other players
in the space. As an interesting aside, he points out that while Altera and Xilinx have nearly equivalent revenue and earnings
numbers, Altera trades at half the valuation of Xilinx.
Another specialty chip area that has been flogged to death is the DSP segment. Texas Instruments
[TXN] and Analog Devices [ADI] are two "bulletproof" technology stocks that Morgan notes are
poised for resuscitation. Texas Instruments is the largest DSP provider, with almost 50% market
share. The company got a bounce last week during a tech rally. Analog Devices is the number-four
producer, contributing nearly 8% of the DSPs. Morgan avoids the second- and third-largest
producers, Lucent and Motorola, because those stocks have significant exposure from the non-DSP
parts of their business. And on the heels of Nokia's bullish report, Morgan sees better things for the
cellular handset market, the largest end market for DSPs.
For those looking for a "screaming buy," Morgan posts the freshly battered shares of Intel to his list
of "top ten bulletproof" technology stocks. With Intel trading at more than 40% off its summer high,
Morgan declares, "From a fundamental perspective I think about every possible bad story has been
built into Intel right now. I can't imagine what else they could uncover unless Itanium has some sort of
glitch."
Furthermore, the Grinch has not stolen Christmas, enthuses Morgan, citing Gateway's [GTW]
conference call catchphrase. "I expect fourth quarter to be even stronger because of the release of
Itanium, and also a stronger than usual Christmas season." The Christmas season will likely push the growth of PC sales into the
15%-20% range, but sales of notebook computers, which are growing at 40%, will give an additional thrust. On the corporate front,
Morgan expects momentum in the server market to heat up early next year, driven by the release of Itanium and by Windows 2000's
new NT 5.0 packages coming from Microsoft. That gives Intel an edge over AMD [AMD], because box makers such as Compaq
[CPQ], Gateway and IBM [IBM] use Intel, not AMD, for their high-end servers, asserts Morgan.
A negative report from Teradyne has cast long shadows on the chip equipment sector, says Morgan. But he notes that KLA Tencor
[KLAC] had great numbers, and Novellus Systems [NVLS] raised guidance on the upcoming quarter. Concerns that an
accumulation of inventory will slow capital spending for new semiconductor fabrication facilities are weighing on the sector. Yet
worldwide semiconductor equipment shipments and bookings in July improved 134% over the prior month, notes Morgan. New
technologies are moving chipmakers to use slimmer line-widths (.19 micron), larger wafers (300 mm) and new materials such as
copper. Those three major trends are prodding this sector forward, says Morgan. He is most bullish on the group leader, Applied
Materials [AMAT]. |
