Chip stocks make sharp gains despite warnings
Analysts say firms are cutting capacity to prevent excessive inventories
By Benjamin Pimentel, MarketWatch
Last update: 11:59 a.m. EST Dec. 9, 2008
SAN FRANCISCO (MarketWatch) -- A volatile tech market got a pleasant, if puzzling, surprise Tuesday as shares of chip companies jumped -- despite serious earnings and revenue warnings from major players.
The Philadelphia Semiconductor Index ($SOX:
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$SOX 208.72, +12.57, +6.4%) was up more than 7% in morning trading - far outpacing the broader Nasdaq Composite Index (COMP:
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COMP 1,578.02, +6.28, +0.4%) .
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And this happened just after major chip manufacturers and makers of chip making equipment, led by Texas Instruments Inc. (TXN:
Texas Instruments Incorporated
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12:11pm 12/09/2008
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TXN 15.76, +0.94, +6.3%) , Broadcom Corp. (BRCM:
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BRCM 17.16, +1.70, +11.0%) and Novellus Systems Inc. (NVLS:
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NVLS 12.54, +0.36, +3.0%) all lowered expectations for the current quarter, citing weakening demand.
Analyst Brian Piccioni of BMO Capital Markets was at a loss to explain the market reaction.
"I don't know for sure," he said. "There is always a lust on Wall Street to buy techs during a downturn. It's a strange disease, but prevalent. There are fantasies about inventory levels, and how tech improves productivity. I don't subscribe to those delusions, so I just don't know. What I can say is that it looks like, week by week, global trade is slowing. And that's bad."
Over the past few weeks, chip giants Intel Corp. (INTC:
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INTC 14.49, +0.55, +4.0%) and Advanced Micro Devices Inc. (AMD:
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AMD 2.23, +0.13, +6.2%) cut their revenue forecasts. On Monday, TI and Broadcom also lowered their outlook. On Tuesday morning, chip tools maker Novellus Systems said its results this quarter will be "below the low end" of its guidance, and also announced plans to cut 10% of its workforce.
Broadcom was up 10.5%, while TI was ahead 6.2% and Novellus gained 2.5%.
Analyst John Dryden of Charter Equity Research speculated that many investors and analysts had already anticipated the decline in sales. "So it's really bad out there, but in-line with their recessionary expectations."
He said some companies are also "cutting output more aggressively than in previous downturns." That may "prevent a deep inventory correction" and cause a favorable snapback when demand returns.
"In the past, many companies waited a couple quarters before trimming factory utilization or cutting outsourced manufacturing orders, which lead to an extended period of lower sales in order to lower internal inventory," he said.
Furthermore, Dryden added, there's "lots of people on the sidelines trying to call a bottom and wondering if it can get any worse."
Analyst Rob Enderle of the Enderle Group also cited aggressive prices, which he said is moving inventory and boosting outlook in 2009. "Less inventory at the end of the year means a better 2009," he said.
Enderle also pointed to President-elect Barack Obama's recent pronouncements on improving the information technology networks in schools. "The market is likely reacting to these plans and investing in the improving anticipated forecast that should result," he said.
Analyst Doug Freedman of American Technology Research speculated that investors "are thinking number cuts are overshooting true demand decline," adding that the rally "could be a short covering move as well as bad news is now getting marked into estimates." End of Story |
