TALES OF THE TAPE: Chip Recovery Remains Elusive >INTC
08 Jul 14:00
By Donna Fuscaldo
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--It wasn't supposed to be like this.
This year was expected to mark the recovery for semiconductors, when a
rebound in orders for personal computers, cell phones and networking gear was
to lift the industry's fortunes.
Instead, chip stocks are setting new lows almost on a weekly basis, and the
markets for semiconductors remain depressed.
Shares of chip leader Intel Corp. (INTC) traded Monday morning at $18.17,
down 42% since the beginning of the year and less than a quarter of their
mid-2000 peak. Stock in Intel rival Advanced Micro Devices Inc. (AMD) has
likewise lost 43% so far in 2002, trading at $9.02, less than a fifth of its
peak. Texas Instruments Inc. (TXN), at $24.36, is down just 13% year-to-date,
but it too has been cut in fourth from its highs of two years ago. And Micron
Technology Inc. (MU), at $21.02, down 32% since the start of the year, is also
less than a fourth of where it was in 2000.
While some positive data have emerged in Chipland, the bad news, such as
revenue warnings from Intel and AMD and a surprise quarterly loss from Micron,
seems to be outweighing the good.
Against this backdrop, investors have to be wondering when things will get
better and if chip sales will ever return to the pace of early 2000.
Although many analysts and industry experts agree sales of chips won't reach
the $200-billion-plus they recorded in 2000 until 2004, how business will fare
in the meantime is up for debate.
Here's a look at the major markets chip companies participate in and what
analysts, investors and industry experts expect in the months to come.
PCs Were First To Fall Off The Cliff
The personal-computer market, historically one of the largest segments for
the semiconductor industry, was one of the first to feel the pain ayear and a
half ago.
Lackluster demand for PCs and a slowdown in spending by corporations hurt
chip companies supplying that sector, including Intel, AMD and Micron.
Coming into 2002, forecasters were predicting a surge in spending on PCs from
consumers as well as corporations, but such hopes have been dispelled, both by
the flaccidity of the economic rebound and by corporate scandals which threaten
to weigh on consumer confidence.
Right now, sales of PCs are very slow, said Steve Cullen, director of
semiconductor research at InStat/MDR, a Scottsdale, Ariz.-based market research
firm. The PC market is recovering somewhat, but it's at a snail's pace, he
said.
Last week Merrill Lynch took an ax to its forecast for worldwide PC growth
this year, slashing it to 2.5% from 10.5%. Analyst Steven Fortuna blamed weak
spending by the government, a slow start to the back-to-school shopping season,
a sluggish corporate IT spending environment, and a breakdown in consumer
confidence.
Adding to the woes of the PC market and its suppliers is a shift in spending
by consumers. In the fourth quarter of last year, many consumers were buying
high-end machines running on Intel's new Pentium 4 chip, said InStat's Cullen.
Now the mix has shifted to lower-end machines, which will put pressure on chip
makers' margins, he said.
On the corporate side of the computer market, a brutal spending environment
for technology has dragged on longer than many had anticipated.
"I've seen all kinds of surveys that point to things getting back on track,
but they don't show much improvement through fiscal 2002," said Daniel Morgan,
a portfolio manager at Boca Raton, Fla.-based Noble Financial Group, who owns
shares of Intel and other chip stocks.
Some, however, refuse to give up hope. Investec analyst Eric Ross said he
expects to see corporations begin spending at the end of 2002, with more robust
corporate purchases coming in 2003,fueled in part by new applications like
Microsoft Corp.'s (MSFT) Window XP operating system, which he said will save
corporations money.
Ross, who rates Intel and Micron strong buys, said these companies' shares
will start to go up "substantially" in 2003. The analyst, who has a 12-month
$35 price target on both Intel and Micron, projects PC unit growth of 3% this
year, and 13% in 2003.
Hopes For Wireless Handset Growth Weren't Met
In 2000, wireless handsets were one of the fastest-growing segments for chip
makers. Shipments of handsets, which use a lot of silicon, climbed
substantially from the year before, and many industry watchers were predicting
robust growth for years to come.
But the promised growth never materialized. The reasons were varied - a lack
of new technology, slowing economic conditions, and high penetration rate in
key European and U.S. markets, which created excess inventory, weighing on chip
makers such as Texas Instruments, STMicroelectronics NV (STM) and Analog
Devices Inc. (ADI).
Since then, chip companies have worked off a fair amount of the excess
inventory, but with demand not expected to be storming out of the gates any
time soon, investors and analysts aren't taking a bullish stance on that
segment of the industry.
Following an earnings warning from Finnish handset maker Nokia Corp. (NOK)
last month, Lehman Brothers cut its forecasts of handset growth to 4% this year
and 11% in 2003, from earlier forecasts of 7% and 13%.
Lehman chip analyst Daniel Niles said that new-generation phones will fuel
some demand, but pricing pressure from handset makers could hurt margins for
chip companies that supply that market. Expectations for handset revenue growth
this year have declined to a range of flat to 4% from previous expectations of
5% to 10% growth, he noted in a recent research report.
Despite the near-term concerns, Noble Financial's Morgan sees reasons for
optimismover the long haul. "There is tremendous opportunity in China and
other countries," said the money manager. Eventually, mobile handset
penetration will reach 1 billion users worldwide, compared with 450 million to
500 million right now, he said.
While industry watchers expect demand for PCs and wireless handsets to
recover next year, the networking and telecommunications infrastructure
markets, still suffering from overcapacity and excess inventory, remain a big
question mark.
In the networking market, it's difficult to get a handle on how much
inventory has really been flushed out, said InStat's Cullen. "Networking
inventories have many levels...plus bad news keeps coming out of the
end-markets like WorldCom," he said.
Meanwhile, the once-highflying telecom sector has fallen on tough times.
Telecom companies spent billions building out networks, which now remain idle.
"Telecom is the worst end-market we follow," said Investec's Ross. "It will
take the longest to get back because it has the most capacity and the most
inventory." Ross, who rates telecom-chip suppliers Altera Corp. (ALTR) and
Xilinx Inc. (XLNX), a hold, doesn't expect the market to reach its 2000 levels
until 2005.
Echoing Ross' pessimistic view, Noble Financial's Morgan said that was
precisely why he unloaded shares of Xilinx and Altera. "They will be the last
to come around as far as a recovery is concerned," he said.
While the semiconductor downturn has devastated many segments of the market,
chip makers that supply the consumer electronics industry have fared much
better.
"The areas that have done relatively well over the last year are consumer
electronics, like DVD players, large TVs, MP3 players and digital cameras,"
said InStat's Cullen. " A lot of that is because consumer confidence stayed
up," he said.
But with consumer confidence ebbing, will DVD chip makers like ESS Technology
Inc. (ESST) and Zoran Corp. (ZRAN) continue to enjoy robust growth?
Investec's Ross thinks so. "Consumer electronics will be the biggest driver
of semiconductors for the next five years," said the analyst, who rates ESS and
Zoran strong buys. He estimates that chip revenue from DVD players will grow
from $4.9 million in 2002 to $8.4 million in 2006.
But InStat's Cullen isn't so sure consumer electronics - or anything else for
that matter - will drive growth like PCs did.
"There is no new killer app out there that you can put your finger on and say
this will be a driver of a huge amount of demand," said Cullen. "People are
waiting for old things to recover - when will PCs turn around, when will cell
phones pick up, when will networking come back. Nobody's saying, 'gee here's
this great new gadget.' There's nothing like the PC on the horizon."
-By Donna Fuscaldo; Dow Jones Newswires; 201-938-5253;
donna.fuscaldo@dowjones.com
(END) DOW JONES NEWS 07-08-02
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