This. Worth a read.
On July 1, 2000, Intel was 72.41 on August 1, 2000, Intel was 74.77. The date of the art is July 10, 2000.
Is Chip Bubble About To Burst?
July 10, 2000 (2:16 p.m. EST)
By Bolaji Ojo , EBN
Is the semiconductor market's two-year upcycle winding down?
The mere suggestion provoked a furious rebuttal last week frombullish industry leaders, whose cries of protest sought to drown out the dissenting opinion of a lone Wall Street analyst.
But despite repeated assurances that the sector's fiscal outlook is still positive, a number of fundamental questions remain: How reliable are current component and OEM sales forecasts? Will rising capital expenditures lead to overcapacity, and if so, when? Are clouds gathering on the chip horizon or only in the eye of one observer? In other words, how healthy is the semiconductor industry, really?
Coming so soon into an upturn that many predict will last up to four years, these were not questions the semiconductor industry was expecting. But in a report released last week, Jonathan Joseph, an analyst at Salomon Smith Barney, San Francisco, cast doubt on assumptions that the current chip upturn will stretch well into 2001 and perhaps beyond.While not forecasting a downturn, Joseph's report noted that a "slowdown in the [semiconductor] group may take six to nine months...given what we believe are slowly reversing industry fundamentals."
Drawing a bead on several leading semiconductor companies, particularly in the area of flash memory, Joseph lowered his ratings for Advanced Micro Devices (stock: AMD), National Semiconductor (stock: NSM), Silicon Storage Technology (stock: SSTI), and Texas Instruments (stock: TXN).
"For most of this year, we have become increasingly concerned about the top-down picture, but have been reassured the upcycle was intact as lead times continued to extend, prices firmed, and inventories remained low," Joseph said. "The bottom-up picture, however, went cautionary recently, apparently brought on by a slight slowing in cellular phone growth expectations and the rapid increase in capacity. We do not believe summer slowing is the culprit."
Joseph lowered his rating on the semiconductor industry to "neutral" from "outperform" based on the following observations:
• Capital spending growth should peak this year, and peak years in capital spending closely correlate with peak years in semiconductor growth;
• Unit growth reached 34 percent in February, an all-time high, but has fallen three months in a row, settling at 30 percent in May;
• Lead times for components such as power amplifiers, DSPs, and tantalum capacitors are contracting;
• Average selling prices of some commodity components have begun to moderate in the spot market;
• Inventories are rising at semiconductor companies and contract manufacturers.
Many industry executives dismissed Joseph's report as too general, while several analysts faulted some of his assumptions, including his emphasis on capital- expenditure growth. At Texas Instruments, SST, and National Semiconductor, miffed executives disagreed that the semiconductor industry -- and their segments of the business in particular -- may be headed for slower revenue growth.
"Nobody has a perfect crystal ball, but the signs we're seeing are pointing to a lot of strength, not only this year but for 2001," said Ron Slaymaker, vice president of investor relations at TI, Dallas.
"I don't believe we have reached a peak," said Bing Yeh, president and CEO of SST, Sunnyvale, Calif. "My feeling is that this upcycle will last at least four years."
Based solely on such industry anecdotes, Joseph's expectations of a potential reversal in the chip market and especially flash memory may seem inaccurate. Industry executives at SST and Samsung Semiconductors, San Jose, Calif., said their flash memory production for 2000 and the first quarter of 2001 are already sold out.
"We don't see a slowdown three or four quarters from now," Yeh said. "We're taking orders now for the second and third quarters of 2001."
Similarly, at Samsung all memory chips are in short supply, and the situation is getting worse, according to Bob Eminian, vice president of marketing.
"We only see a very tight market for some time to come," Eminian said.
Samsung is also sold out of SRAMs for nine months, and DRAMs are sold out well into the fourth quarter of this year, he added.
In the DRAM market, Hitachi Semiconductor (America) (stock: HIT) said demand continues to exceed available industry supply. Ron Bechtold, vice president of the San Jose company's DRAM division, sees no change in sight.
"The proof is that DRAM prices continue to rise on both the spot market and on OEM contracts," Bechtold said.
National Semiconductor executives said they are "quite bemused" by assertions that the company's position may be weakened by exposure to the cellular handset and commodity-analog markets, as noted by Joseph in his report.
"Our business looks solid," said Pat Brockett, executive vice president of analog products at National Semiconductor, Santa Clara, Calif. "We aren't seeing anything that would change our guidance to the Street. We're not seeing lead times coming in. For that matter, they've never gone out. We've been judiciously expanding our capacity for the last five quarters, and we've held lead times in the six- to eight-week range. We haven't put anything we sell on allocation."
National draws about a quarter of its revenue from wireless; however, Brockett emphasized that a significant portion of that amount is sold into infrastructure equipment, which is growing by leaps and bounds and is far less subject to market fluctuations than handsets.
"To draw a conclusion that we've got a weakness in 25 percent of our business -- which, by the way, we're not seeing -- while holding our earnings per share forecast is very strange," Brockett said.
Neither is National's commodity-analog business -- roughly 15 percent of revenue -- under price pressure, the company said. Rather, the products are experiencing robust sales in the distribution channel.
National gauges the market by looking at long-term trends in demand for certain circuits. Some 85 percent of its products are proprietary, requiring close design-in relationships with customers. In this way, National can get good forecast data from customers, Brockett said. The company also looks at industry projections for PCs, peripherals, handsets, and the general economy.
"There's nothing we're seeing that would say the market isn't going to grow somewhere around 40 percent this year and have another healthy year next year," Brockett said. "Even if industry growth next year cooled off to 25 percent, I wouldn't call that a slowdown."
A spokeswoman for Infineon Technologies (stock: IFX), Munich, Germany, said the company sees no signs of a slowdown in the immediate future and that orders for Infineon's products continue to exceed manufacturing capacity.
"Our backlog is very good, between six and 12 months out," she said. "There are no worries here at all. Business is still very positive."
In fact, the future appears so rosy at Infineon and several other chip makers that many companies have taken to pre-announcing positive second and third quarter results. In June, Infineon raised its fiscal 2000 third quarter income estimate and advised investors that "higher memory prices, which have been rising sharply since June, as well as above-average productivity gains, if continued, are likely to lead to even higher income in the fourth quarter."
Executives at Future Electronics, a top-tier electronic components distributor, said signals from its chip customers do not indicate a slowdown in the year ahead.
"At this point in time, demand is excellent and we don't see any signs of weakness in our semiconductor segment," said Bob Vaupshas, vice president of marketing at Future, Pointe Claire, Quebec. "Our backlog is very strong, about six to 12 months out in certain segments."
Salomon Smith Barney's Joseph does not dispute the likelihood that several segments of the semiconductor industry will continue to witness strong growth in the next several quarters.
However, he said next year the industry is unlikely to repeat or exceed the more than 30 percent revenue growth forecast for 2000. Joseph said capital expenditures should peak this year, signaling the beginning of a slowdown in semiconductor revenue growth.
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Additional reporting by Jack Robertson, Crista Souza, and Darrell Dunn
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