Is It Time To Cash In Your Chips?
By ERIC SAVITZ / Barron’s / Nov 10, 2001
Tom, though this article is a month old, the warnings/
predicitions it contains are well worth heeding in my
opinion. Might explain why the markets reaction to
yet another Greenspan cut was so dismal last week.
Peter.
"Well, that settles it. We're heading for a big-time recovery in chip demand. It says so, right here in the latest forecast from the Semiconductor Industry Association. The trade group expects chip sales will finish this year down a whopping 31%, but that sales will rebound to show 6% growth in 2002, followed by 21% gains in both 2003 and 2004. Woo-hoo! Just like old times.
Alas, the SIA's track record for predicting demand is a little, uh, unreliable. Care to guess what the SIA had predicted one year ago for 2001? Would you believe 22% growth? In other words, they whiffed big time, which as it happens is not infrequently the case with the SIA's forecasting.
But let's not be too hard on them; the truth is, forecasting chip demand is a chancy business at best. Terry Ragsdale, a semiconductor analyst at Goldman Sachs, hesitates to provide projections for more than a quarter or two. Press him, and he'll predict a flat year for 2002.
Nonetheless, Ragsdale thinks chip stocks should perform well next year, figuring that investors will flock to the sector at the first signs on an economic recovery. But -- and this is a big "but" -- Ragsdale warns that before that happens, the chip sector looks vulnerable to a serious reversal. For starters, he notes that the stocks have been on a tear. The SOX, the semiconductor stock index traded on the Philadelphia Stock Exchange, rose more than 46% from October 2 through Wednesday's close.
And Ragsdale warns that the stocks have "no valuation support," by which he means that they're trading about 50% above the levels at which the sector bottomed in previous cycles. If the sector -- or the economy -- hits any land mines by year-end, he says, the stocks could swoon.
In particular, he worries about fourth-quarter PC sales, which he expects to take a serious hit in the aftermath of the Sept 11 attacks. And despite the proliferation of cell phones, personal digital assistants, routers and other gear, PCs remain a major driver for the chip industry.
Fred Hickey, who pens the High-Tech Strategist, a newsletter based in Nashua, New Hampshire, says chip investors are ignoring a key piece of bad news on personal computer sales: a slow uptake for Microsoft's Windows XP, which was expected to drive a strong fourth-quarter for PC makers. Hickey notes, for instance, that Radio Shack reported October computer product sales down 50% from the level a year earlier. Meanwhile, NPD Intellect, a market research firm, reported last week that Windows XP sales in the first three days totaled about 300,000 copies, below the roughly 400,000 sold in first few days following the Windows 98 launch.
Meanwhile, Jim Covello, Goldman's semiconductor equipment maven, sees his sector "setting up for another down leg." He cites three developments that could pressure equipment stocks. One is Wed's earnings call from Applied Materials, which Covello thinks will prove disappointing. He also expects increased evidence of a slowdown at Asian contract fabricators and test houses. Not least, he sees trouble ahead in Intel's expected January disclosure of 2002 capital spending plans.
Intel spent $7.5 billion on new chipmaking gear this year; Covello expects the 2002 figure to shrink to $5- $5.5 billion. That's an interesting call, since Intel has already hinted that the budget would be down only 10-20 percent, which implies spending of $6-$6.75 billion. But Covello thinks that Intel had been trying to soften the blow, and will ratchet down further. Covello's chip-equipment picks? He has none.
-- In a research note from its software conference in Carlsbad, California, last week, Goldman Sachs (this is Goldman week here at Plugged In) said that many of the presenters reported "sales activity" has improved from the aftermath of the Sept 11 terrorist attacks. The implication: Fourth-quarter sales might not be down from the third quarter's, as has been feared.
Alas, this isn't saying much. For one thing, the fourth quarter is the seasonally strongest for technology, the third the seasonally weakest. Moreover, Goldman notes that "we are still in a recessionary environment and business conditions will likely be sluggish for several more quarters." And not least, let's not confuse "sales activity," which implies a pickup in sales calls, with actual, honest-to-goodness, the-check-has-cleared, sales.
On a related note, Goldman last week released a survey of Information Technology spending plans at 100 Fortune 1000 companies, and they offer little solace for the V-shaped bottom crowd. More than half of the respondents expect tech spending in 2002 to be flat to down from 2001, with a bounceback unlikely before next year's second half, and a return to normalcy in 2003 "more likely."
And here's an unsettling finding: Asked, "What do you consider your normalized IT spending growth rate to be?" nearly four out of five said 10% or less -- and 40% said 5% or less. Goldman notes that since 1992, "trend IT spending growth has been much higher," at 10%-13%.
No surprise there to the Precursor Group, a Washington-based research boutique, which has been warning for months that the tech recovery will be a meek one. "We see few big catalysts for renewed tech spending growth," Precursor's Bill Whyman wrote in a recent research note. "Broadband growth is slowing, compelling applications are few, balance sheets are weak and brutal pricing continues. Growth will return to tech, but likely not as quickly or robustly as markets may expect." |
