*AV*--I mulled over and evaluated your post and the comments made by Mr. Kurlack. After careful consideration I find it hard to challenge the apporach and logic presented. However, it is one man's opinion, albeit a logically thought out commentary. Therefore, I will not and cannot challenge it. However, I would like to add some additional morsels of thought to consider along with his comments.
1. The global economy has not been satuarated with microelectronics by a long shot. The degree of industrial, commercial, and consumer usage of semiconductors have not reached critical mass in China, Eastern Europe and many third world countries as it has in the US, Taiwan, Korea, Japan, United Kingdom, etal. There is room for growth even at the present technological levels. That means more equipment for meeting the market demand for goods.
2. I think China is still on track for cellular/satellite telecommunications as their infrastructure since the traditional above ground or underground systems will just no be cost effective. Lots of components for the world's largest market.
3. Semcionductors are going into everything on a broader scale. Whether it is in consumer electronics (who would have though the Gigapet would be such a hit.), medical devices, automotive (silicon content goes up each and every year), or a host of audio-visual-computational products. Pretty soon your household will be run by computers and your environmental controls within the home will be computerized.
4. We all thought that 40Mb hard drives were all anyone would need (until Bill Gates came along). Now, why would any fool want more than a 4 Gb hard drive??? Well, we shall see down the road why.
5. We are getting very close to the George Jetson age of Video-phones and education from the confines of our own homes. Couple that with on- demand satellite movies and/or educational courses or even the emerging Virtual Reality Market.
Actually this drives right to the heart of some of the comments made in your post, Bandwidth. A convincing dissertation was presented in your post. Bandwidth, I/O, storage requirements for waveforms or data streams, etal., are becoing the major hurdles for new technology implementations.
Maybe we do not need 600MHz Hexium IIs or Septium IIIs. Maybe we do not need multi-processor systems such as the new motherboards allow. Certainly we have all heard about Parallel Processing Technology and the "Holodecks in our Future" scenario. A company that is now either part of the NCR or is still part of LU, was TeraData systems. TeraData was going to provide the level 6 or level 7 system that eventually could be expanded to a 1000 processors. This is probably what will be needed to create Virtual Reality "Holodecks" down the road. Whoever thought we would have motion pictures, or that we would having talking movies, let alone color films with dolby surround sound and 3D graphics. (BTW-3D graphics and MPEG video and heavens knows what when the full potential of DVD is explored or its next offshoot). We see the area of Virtual Reality moving from stock figures to slightly inferior basic animation and now into basic cartoon type animation. Down the road, you won't be in a room with 200 other people watching 360 degree surround sound IMAX type movies. You will pop on you VR helmet, plug in your 5th generation DVD-CD and be part of the movie or part of the site seeing tour in Italy or even blasting off in the space shuttle. Yeah, all this stuff is goofy and people are starving around the world AND the world economy is faltering. Yet, to use a cliche, "Buy Beer and Liquor Stocks for stability since in good times everyone is partying and celebrating. And in bad times, its the cheapest form of entertainment to drown your sorrows and forget your problems".
6. The full potential of telecommunications has barely been reached. We are now talking about putting Ma Bell out of long diustance business if we can increase the volume and bandwidth on Internet Telephony. The full potential of the cheap low end PC has not reached its maximum exposure.
I remember some "horror stories" from my days in New York concerning low income to Welfare recipients. I was a foolish youngster, fresh out of college, working for low wages ($7500/yr in 1975) and very intolerant of hearing that certain individuals were being provided with color TVs and Phone Service in order that their kids should not be put at a disadvantege to the middle class kids that were benefiting from Sesame Street or communicating with fellow schoolmates after hours. I was busting my butt and these things were being handed to them. Well, that insensitivity and borderline bigotry was, thankfully short lived. "Give a man fish and he eats for a day. Teach him to fish and he eats for a lifetime." In this light, the under $1000 PC with the features afforded will allow more PCs to be put onto desks where they haven't been before. Couple this with internet access and you have the makings of a feassible system where can be trained, can learn without the stigma or issues present in some of the schools, provide exposure to worlds outside of the immediate areas in which they live, provide access for the emotionally or physically challenged, and allow the "challenged" (Boy I hate that word but its the best we have so far) to participate more fully into society. The deaf can "hear", the blind can "read", etc. Speech Recognition technology has not reached its full potential. I should know. I still am a 5 fingered typist, a real Typing Tutor Dropout. Beleive me, I will be the first on my block to run out and buy the first real package that will convert my speech into text with 99.95% accuracy and precision.
7. Without going into real detail, consider MEMS technology (Microelectro Mechnanical Systems) as implemented by Analog Devices for the Air Bag Controllers. The first integrated approach (integrating both the mechanical and integrated circuitry on the same chip) to MEMS for commercial accelerometers. With the advances in dual cavity packaging, the combination of the individual MEMS device with an IC right next to it is also being implemented. MEMS is still in its embrionic stages and we will see it used in medical devices, pressure, flow, volumetric, power regulation, and a host of other applications, spearheaded by the automotive industry. This is a new fromtier that will rejuvenate older fabs and will require the constuction of additional facilities.
8. And let us not forget cost competitiveness. If nothing else, the drive to make more of the same widget at lower costs always drives manufacutring to upgrade its equipment set to compete.
These are just some thoughts to consider. Mankinds love affair with the internal combustion engine has not vaporized NOR has it been implemented everywhere it can be. NOR is it necessary to be implemented everywhere. Yet, year after year, more and more cars are being sold, with each generation supposedly more cost effective (better mileage and longer life expectancies). We are still in the midst of the Automotive Revolution (not necessarily cars but of motor driven widgets) and the Big Three have yet to declare bankruptcy. And after all, when it does come to cars, they still only get you from one place to another. Yet look at what we place in these modern day chariots: CD players, GPS (Global Positioning Systems), Climate control, Surround Sound, video players, celluar phones, massaging seats, etc. All these items increase the IC silicon content of the car.
The love affair with microelectronics is still in the early stages of puberty, IMO. The day will come when vacation means going off line from your massaging barcolounger in your ski condo in Vail or your own home. Think about it:
Pop on your VR helmet with integrated Plantronics Headset from the confines of your home or vacation resort. You and the rest of your staff are "plugged" into each other. You all see each other and can almost "reach out and touch each other" (what a phrase, someone should use it as a slogan). The boss determines the "ambiance for the day". You know, you are either in his office for a tongue lashing, in the conference room with others, or in the corporate board room doing a presentation. Who knows, it might even be a relaxed offsight meeting.
Whatever the case, you don't have to put up with the catered food they serve at those functions, nor do you have to squirm in those uncomfortable chairs. You can even be casually dressed. All the information is at your finger tips (or keyboard). Faxing or Internal Website connections allow the transfer of info to an from instaneously. You catch my drift. Occasionally you go into the office and have a dull face to face.
Is the above outlandish. Heck no. I am seeing more and more Design Engineers leave the confines of the office and set up Virtual offices.
I know of a very good Engineer that "resigned" from my old company. Well, not exactly. He has enogh money to realize a dream of his. He wanted to Live in Park City, Utah and no longer wanted to live in Colorado. No Problema!!! An ISDN line, cable modem, Ultra Sparc workstation, large local storage capacity, and a few phone numbers and he was all set up. He works his hours when he wants to and is not confined to the 9-5 grind. He has a PCS for realtime response to issues that come up and is able to "work around the house". We all know about ATT's Tele-Commuting forays of the past. It is here.
It is hard to conceive that the microelectronics industry is going to shrivel up and die. The negative you mention may very well occur but I beleive there are positives to replace them that have not been conceived yet. As Stephen King has stated in his Dark Tower Anthology, "There are other worlds than these" and these worlds or "doors" to these worlds open up as others close behind you. As for the weakness seen at the likes of Altera and others, I chalk it up to not moving fast enough with the shifts taking place in the industry and with the end user. Case in point, who wants to buy a 2.0 Gb hard drive anymore. As a matter of fact the price difference between a 3.0 Gb and 5.1 Gb drive is hardly worth mentioning in the scheme of things. The disk drive guys are getting hit because the "other worlds" are moving along way to fast. All you have to do is look at the life cycles of the Design Technologies used to manufacture some of these chips or producsts. There are companies promising to deliver products on devices technologies that haven't even been fully defined and formalized yet. (With a notable exception of IOM which has done a marvelous job of creating high in demand products based on old established, cost effective and reliable processes. Beleive me, neither the Zip, Zip Plus or Jaz products have any significant cutting edge technology. It is just a great utilization of off the shelf technology. This is to their credit).
In conclusion, I want to address some specifics from your post.
We expect 40% to 50% cuts in capital spending & layoffs throughout 1998.
Quite possible but unlikely. New facilities are opening up relative to IC manufacturing with the MOT Virginia Plant the most worthy of note. Is there an issue on the equipment supplier side? Possibly, but it is more of a disconnect between their capacity brought on over the past 18 months and the number of new fabs that were put on hold over the last year. They could be ready but now have to wait for the next semiconductor expansion cycle that was delayed. Possibl bad timing.
It's unlikely the semi stocks have seen their lows.
Again possible, but if they get any lower, you will see 2 things, IMO. First, a great deal of stock buyback taking place. Lots of the big boys have large cash inventories (especially AMAT to name one). This is a good thing for those still holding onto their shares. Second, a new round of consolidation where the strong gobble up the weak rather than the weak going out of business. This is a very healthy thing unless taken to the monopolistic extremes which AMAT could be getting very close to. Fair prices could give present holders of these companies a decent pop in valuation. Look at the recent rumored takeover comments on some of our favorite stocks.
We might have another 25% downward risk in the group as a whole going forward.
Okay, stake in the ground for me. I doubt this very much. The PE multiples have already fallen to acceptable levels and the business picture is not that bleak. The PEs are getting back into the comfotable 20s and low 30s for most of the companies and will get even lower as the new round of buying takes place within the next cycle. YES, there will be a next cycle if we don't freak each other out first.
We're NOT looking to buy for a bounce on any weakness.
Not smart to say this as a generality. This is a market of stocks not a stock market. Each company needs to be judged on their own merit. As for me, I think those companies that are involved with "enabling technologies" that improve yields, allow new types of devices to be manufactured, or reduce costs, will do well no matter how the overall industry turns. Prgress does not come to a screeching halt. Enabling technologies are CMP, CFM, Inspection/Detection, DUV, PGILD, Copper films, etal. You might need to be more selective and do you homework. you might also have to wait longer than these guys at Merrill are willing to wait. BTW-not to sound too obnoxious but I am almost convinced that when brokers say buy, it time to sell since they are unloading shares into the buy recommendation. When they say run to the hills, it almost encourages me to buy before they gobble up all the deals. The BusinessWeek article (cover story) from Dec the 4th issue, I believe, deals with the Chop Stocks. While this kind of unscrupulous stuff is being done by lowlifes, I cannot help but believe that grey area to slightly on the legal side of this same scenario is not being played out in other higher quality circles. I see it in the allocation of IPO shares on a routine basis.
We don't expect much follow-through on any possible near term strength.
Again, quite possible. BUT, I am starting to look at this as more of a mid to long term basis. When akll is said and done, INTC, DELL, CPQ, MSFT have gone through numerous cycles within the industry. Though, in the long run, if you weathered the storm, it paid off handsomely, even at today's prices. I do not regret having my 401K tied up some of the aggressive mutual funds either. I think greed kills you in the long run. Anyone who got into CYMI at under 10 and did not take a 4,5,6,7, 8, or 9 bagger along the way has only themselves to blame. The person that held tight onto IOM through all the mayhem is a very happy camper still. Timing and proper discipline pay off. ASYT at 28.5 to 32 is a great roller coaster as well as CFMT in its new trading range. Therefore, even in a near term perspective, playing the uncertainty (which is really volatility) can yield a decent return on your investment. In bad times, I guess you become more of a trader or a long term holder. In the good times, you are more apt to let the profits run.
We recommend reducing positions on semi stocks on any rallies.
Sounds like a plan to me. I have some low priced shares and am willing to sell into a good rally. I can go cash to the side or wait for the next pullback cycle and buy more shares. Rallies usually are followed by declines which means volatility. However, prolonger rallies never hurt should you be in stocks and not cash when it happens.
Finally, for every buyer there is usually a seller. That usually means there is a winner and a loser as the stock moves on in price. If the stock stagnates, well, you have two losers since their money is not working for them (unless they are playing the options angle and let premiums slip away into their pockets).
Nothing like a lazy Sunday Morning being stretched into a lazier Sunday afternoon due to typing skills. I hope you enjoy this perspective and selection of points to ponder.
Andrew
This is from conference call of 12/2/97. |
