Herb's dead nuts on IMO....here is the text of that link, he's in my camp :-)
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Betting On a Tech Recovery? These Stocks Won't Deliver
Communications-chip makers are trading as if earnings were jumping. They're not.
FORTUNE
Monday, September 3, 2001
By Herb Greenberg
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Tech investors are desperate for any sign of a bottom. When Broadcom CEO Henry Nicholas mentioned in July that business was "stabilizing," it seemed they'd gotten what they were looking for. The stocks of communications-chip makers like Broadcom, PMC-Sierra, and Applied Micro Circuits, which had plunged by more than 75% from their highs, have snapped back over the past four months. Broadcom in particular, at $47, has rebounded an astonishing 75% from its April lows. The worst, it would seem, is over.
Don't be fooled into thinking so. These companies are joined at the hip to the companies that have created the telecommunications infrastructure--the Ciscos, Nortels, and Lucents of the world--and that industry is in no way in the clear. That is leading to a grim prognosis for those who sell chips to them. "Most companies in the group could be expected to lose money for the next four to six quarters," says Merrill Lynch chip analyst Mark Lipacis. He says that any pickup over the next year, or even two, may come in fits and starts as beleaguered customers slowly whittle away their own bloated inventories, reordering only to fill the occasional gap.
Making matters worse, it looks as if an old-fashioned price war is in the offing. Demand is anemic now and doesn't look as if it will improve soon. Lipacis expects that nonwireless capital spending by communications-chip customers, which grew by 20% to 40% in each of the past two years, will fall sharply this year and next. That gives buyers tremendous leverage, making a cutthroat business even nastier. "Competition is getting more intense," Lipacis says, "and we've already heard of some vendors discussing the potential for discounts--whenever they see larger orders again." Jim Coleman, an analyst at the Boston brokerage firm Fechtor Detwiler, says customers like Cisco are pitting such chipmakers as Xilinx and Altera against each other to get the lowest price. That is a marked switch from last year, when companies were lucky to get the chips at all! So desperate were the customers that chipmakers offering immediate delivery could name their price. Now, Coleman says, some chipmakers are willing to lock in a fixed negotiated price as long as 18 months before delivery.
New competition is also coming from engineers defecting from larger chip companies (and disgruntled with their now worthless stock options). "Smaller and more agile [chip] companies are starting up every day," Coleman says, "and are taking a page out of the playbooks that made Applied and PMC the big guns."
So what's moving the stocks? Simple: Investors are afraid they'll miss the turn--that by the time sales start picking up, it'll be too late to buy. That's why Salomon Smith Barney analyst Clark Westmont hasn't veered from the $30 price target he set in April for Applied Micro (now at $19), even though he has slashed his 2002 earnings estimates three times since then (to a loss of 10 cents per share, from a profit of 23 cents), and last quarter's sales came in some $50 million shy of his original estimate of $90 million. "My opinion regarding the company's prospects over the next one to three years is unchanged," he says. "It is the best-positioned company in the markets it serves."
Maybe it is, but as is the case with many of these stocks, Applied Micro's current price already reflects that future growth--and then some! When, then, do these stocks become safe buys? When Lucent, Alcatel, Nortel, and the part of Cisco that supplies Internet service providers start to show sustained growth--and only if, by then, the valuations of chip companies have come down in line with their real growth prospects. Won't that be too late? Not if they wind up going lower between now and then. You never know when another round of earnings disappointments is right around the corner.
Not As Chipper As They Look
Communications-chip makers are trading as if earnings were jumping. They're not.
Company
Ticker
Price
Forward
P/E1
Profit (Loss)2
millions
Sales2
millions
Market cap
billions
Altera
ALTR
$31
74
$297
$1,266
$10.6
Applied Micro Circuits
AMCC
$19
N.A.
($3,778)
$403
$4.6
Broadcom
BRCM
$47
N.A.
($1,575)
$1,180
$10.1
PMC-Sierra
PMCS
$37
N.A.
($291)
$644
$4.3
Vitesse Semiconductor
VTSS
$22
92
($42)
$485
$3.2
Xilinx
XLNX
$41
143
($40)
$1,584
$11.9 |
