Semiconductor "Super Cycle" Begins In Second Half Of 2010 Spurred On By Netbook Demand From China And India
On Thursday August 27, 2009, 3:29 pm EDT
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67 WALL STREET, New York - August 27, 2009 - The Wall Street Transcript has just published its Semiconductors, Semiconductor Equipment, and Software Report offering a timely review of the sector to serious investors and industry executives. This 103 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
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Topics covered: DRAM Industry Reorganization -- Semiconductor Supply Chain Status -- Netbook Growth -- LCD TV Growth -- NAND Pricing and Demand -- Micro-Electro-Mechanical Systems (MEMS) Demand Cycle -- Ultra Low Voltage Processors -- Semiconductor Inventory Aging and Type -- Processor Power Developments
Companies include: Intel (INTC); Micron Technology (MU); Microsemi (MSCC); STEC, Inc. (STEC); National Semiconductor (NSM); Texas Instruments (TXN); Taiwan Semiconductor Manufacturing (TSM); ON Semiconductor (ONNN); Intersil (ISIL); Linear Technology Corporation (LLTC); Monolithic Power Systems (MPWR);Advanced Photonix (API); Waytronx Inc. (WYNX); LTX-Credence (LTXC); Mattson Technology Inc. (MTSN); Oclaro, Inc. (OCLR); Silicon Laboratories (SLAB); Microchip Technology, Inc. (MCHP); Cohu, Inc. (COHU); FSI International, Inc. (FSII); Jaco Electronics (JACO); Cadence Design Systems (CDNS); Synopsys (SNPS); Mentor Graphics (MENT); Magma Design Automation (LAVA)
In the following brief excerpt from just one of the 22 interviews in the 103 page report, industry experts discuss the outlook for the sector and for investors.
Auguste Richard is a Principal and Senior Research Analyst at Piper Jaffray and Co., focusing on the analog and mixed signal semiconductor sector. Prior to joining Piper Jaffray in 2007, he worked in equity research at First Albany Capital, Hambrecht and Quist, Alex. Brown, and Robertson Stephenson and Company. He also spent several years on the buy side as a technology analyst/portfolio manager at EGM Capital. His semiconductor industry experience includes work experience in R and D, manufacturing and marketing at Intel and PMC Sierra. He holds a Bachelor's degree in Physics from the Rochester Institute of Technology and a Master's degree in Physics from Purdue University.
TWST: Gus, what's going on with the numbers we're seeing in the semiconductor space?
Mr. Richard: It's interesting. I think we are on a roller coaster. Why I say that is that if you go back and take a look at the most significant downturn in semiconductors when the dot-com bubble burst, in five quarters units went down 32%. That's pretty bad. In this downturn, units went down 36% in two quarters. And effectively, the only way that that is possible to happen is if you're just taking inventory out of the system, and clearly when we had the financial meltdown last fall, everybody in the supply chain purged inventory, and then what happened is everybody woke up in February and realized they had no components and started to expedite refilling that pipeline. There have been very strong Q2 reports and it looks like a V-shaped recovery. Intel (INTC) was up 12% sequential in Q2. The last time that happened was 1988. They shipped 850,000 microprocessors that quarter. They were one-tenth the size in revenue, they were taking share from mini and mainframe computers and they grew 66% year on year. Clearly, Intel is not that kind of growth company today. That was 21 years ago. It's far more mature, it doesn't move that fast. So again, I think we have one more quarter of this snap-back and we'll likely overshoot, simply because customers want more until they have too much and then they don't want any.
TWST: That's typical, isn't it?
Mr. Richard: It's very typical, but the velocity of the correction is the highest I've ever seen. This is happening very fast, and if you look at end-demand it is likely going to be down 5% to 10% this year. Semiconductor demand fell 36% in units, 35% in revenues in two quarters. So clearly there was an under-build. In the trajectory we are on, if we have the kind of Q3 that is shaping up, the industry is going to be down 10% year over year in units. It is likely that Q4 will be seasonally weaker than normal and actually could even be down. The numbers after this earnings cycle are likely, for Q4, to be wrong and too high. So that's the short term. If you look longer term, the foundries are full. At the leading edge, the memory guys, if they want to stay in the business, are going to have to reinvest in technology, and I think as you get into the second half of next year you are looking at what I would call a super cycle. I say that for two reasons. The first is that there has been underinvestment in semiconductor capital equipment. Effectively over the last 30 years in cap equipment, the average cap ex to revenue has been 25%, and one could argue that there has been wasteful investment and that ratio is too high, so 20% is probably the right number. It basically would match the depreciation cycle of the equipment. So if you go and you take a look, last year cap ex to revenue was 16%, which is a low number; this year it's an even lower number, about 11%. So we're going to have to have some catch-up spending. At the same time, nobody is putting in any new factories, no new 300mm plants. There is plenty of 200mm capacity but not 300mm, and for memory, 200mm is not cost effective and can't be used. In the foundries, customers are migrating from 130nm, which can be done on 200mm wafers to 90nm, 65nm, and 45nm, and there is not enough of that kind of capacity. The foundries will have to start to invest; there are no empty shells, so either you are going to have to convert an 8-inch plant, which could take a year and a half, two years, or build a new one, which would take a year and a half. The industry is going to have a structural shortage of capacity or ability to grow it rapidly. So that really constrains the supply side.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 103 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
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