Denise,
Quotes from Tom Kurlak (he must have been peeking at our spreadsheets):
Stock prices should reflect the downturn, hitting new lows this summer as companies grapple with slowing demand, particularly
in PCs, Mr. Kurlak said. As the Dow Jones Index broke records last week, most semiconductor stocks muddled in the
doldrums.
"We are not recommending companies in the semiconductor group right now," Mr. Kurlak told Electronic News. "We have
most of the stock on neutral. That's been our position since (late) August." The "neutral" rating includes Intel, National
Semiconductor and Advanced Micro Devices (AMD), major semiconductor suppliers to the PC industry. "Timing is
everything," Mr. Kurlak stressed. "We are still waiting for better values. The current cyclical decline is not over. It's getting
worse. We think the stocks will work lower. We would rather wait. At that time, we'll be focusing more on telecom."
Recently, Intel, major provider to the PC market, predicted a 9 percent decline in quarterly revenues--after years of relentless
growth. AMD, a rival of Intel for PC microprocessor prominence, predicted a significant loss albeit more from production
snafus than weak demand. National Semiconductor/Cyrix, Motorola, Cypress, the warning list goes on.
"Things are very difficult right now and they appear to be getting worse," Mr. Kurlak commented. "For the near term, we are
looking for the second quarter to be a little worse than the first quarter, from an earnings standpoint. With weak orders all
around, it is likely the second quarter will not show much improvement in revenue. Prices are low, so margins are coming under
pressure; earnings will be down sequentially. The first quarter was down from the fourth quarter. It suggests a downslide in the
first half of the year, with the second half 'problematic.'
"The third quarter will reflect seasonal factors, and Europe will not maintain the strength it showed in the winter--no surprise.
This leaves a lot up to the fourth quarter, to make the year. If the industry sees some recovery in the fourth quarter, the whole
year will come out with 0 percent," he told EN.
Only "modest" improvement is seen for 1999.
The culprit: price degeneration in the PC market. Seemingly great for consumers; not so great for the industry.
"The principal problem is that the PC has become a negative force in the semiconductor industry," Mr. Kurlak said. The
average PC has fallen to a price point where it is driving down the value of the chips inside the box, even though there is unit
growth.
"Everyone selling into the PC market is experiencing revenue pressure. And Intel, the biggest producer, expects a shrinkage in
revenue in its first quarter from a year ago. Revenues at AMD and National Semiconductor are also dropping from a year ago.
Revenues at disk drive companies are down. Micron Technology (a DRAM producer) too."
While sales of PCs are accelerating on a unit basis, "the price points of the boxes are coming down so low it is putting pressure
on chip companies to lower prices to do business with the PC companies. They have to cut prices, or somebody else will," he
says. Excess capacity is another big factor.
"We are in a contracting situation for the principal end market for semiconductors. The main driver for the last 10 years has
been PCs. PCs consume about 35 percent of all chips. We have reached a transition point in the industry's history. The third
transition since the 60s, from one demand driver to another."
Mr. Kurlak explained further: "If you look at the value of silicon in the box, you see something like 20 percent of the retail price
of the box is represented by the chips inside. About 20 percent of a $2,000 computer is $400; 20 percent of an $800
computer is $160. Literally IC content, in value terms, in the PC, has dropped too fast to be offset by unit growth. Everybody
is trying to get their percentage of the end price in silicon, and PC companies can't afford to pay the old prices and make the
box for $800."
He continued: "About 10 percent (of the silicon value) usually is what Intel gives to the box. That's the rule of thumb. In the
$2,000 computer, Intel gets a $200 chip in there. Now the average price has dropped.
"Intel has got to cut its ASP down to $120 to be able to sell into a $1,200 box. ASP is just falling too fast, in my view, to be
offset by unit growth, and unit growth has slowed down. Unit growth is about 10-15 percent year over year in the first quarter.
It's way down from a year ago when it was about 20-22 percent.
If the PC and overcapacity are creating problems for the semiconductor industry, the situation in Asia is making it all worse. |
