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Technology Stocks : MEMC INT'L. (WFR -NYSE) The Sleeping Giant? -- Ignore unavailable to you. Want to Upgrade?

To: Zeev Hed who wrote (3394)	5/31/1998 2:46:00 PM
From: Carl R.	Read Replies (1) \| Respond to of 4697

Zeev, I have been contemplating the relationship between the business cycles of the wafer industry with the cycles in the semi-equipment sector. It seems to me that there is no direct relationship, and that at times the relationship could be inverse. Obviously the one thing that never changes is that there continues to be demand for more and more transistors. People expect each generation of product to have more functionality and intelligence than the prior one, whether you are talking about computers, cars, stereos, VCRs or even refrigerators. Each step in product intelligence requires large increases in transistor counts, even if no additional units are sold. Thus the semi industry must continually produce more and more transistors. They can do this by three methods: increasing wafer starts at existing fabs, building more fabs, or moving to smaller geometries allowing higher transistor densities. Of course as prices fall, there is no guarantee that semi receipts will grow, but transistor counts always will. Obviously if semi companies produce more transistors by increasing wafer throughput at existing fabs (i.e. increasing utilization rate), this is good for wafer suppliers, and back end companies like KLIC, TER and COHU, but not good for the front end equipment companies. If semi companies build entirely new fabs, this is good for wafer suppliers, as well as both front and back end companies. If the semi companies choose the third option, smaller geometries, this is good for the front end companies but bad for the wafer suppliers as the semi companies can thus get more transistors per wafer. Clearly the semi industry over-anticipated the growth rate in demand, and overbuilt in 1994-mid 96. Wafer suppliers got sucked into this growth expectation and overbuilt wafer plants as well. As pricing pressures increased on semi companies, they attempted to cut costs dramatically and we saw a small order surge in 1997 for semi equipment primarily aimed towards moving to smaller geometries, but few if any new fabs were built. Thus the semi industry was able to accommodate the growing demand for transistors without increasing wafer starts and without building new fabs. This boosted the stock price of the front end companies, but prolonged the problem for the wafer suppliers (and of course WFR made its problems worse by not reducing expenses for two years). As you posted elsewhere, orders for new equipment are expected to fall to about 30B in 1998. This is even lower than 1997, and would keep the industry BTB at close to .8 where it is now. It is also below the long term rate of investment required for the semi industry to keep up with growing transistor demand. With this fall in orders it seems to me that the ability of the semi industry to continually produce more transistors without a growth in the demand for wafers will end. The consensus is that demand for semi equipment will rise to the 40-50B level by 2000, so presumably there will be an uptick in demand for semi-equipment in 1999, most still upgrades for existing fabs, followed by more new fab announcements in 2000. Thus I would expect the first stage of the recovery to be higher fab utilization rates and more wafer starts at existing fabs as demand for transistors continues to grow but equipment purchases get delayed. Presumably by the end of the year wafer prices could begin to firm, and prices for the chips themselves could also start to firm. Then next year, with existing fabs running at high utilization rates, there would be an increase in demand for equipment. As an aside I looked up the behavior of stocks like KLAC and AMAT in the 1985-87 slump, and they had a variety of surges upwards, but actually hit their low for the period at the end, in early 1987. The same thing happened in the mini-slump of 1990-91. In order for this to happen again these stocks would have to fall to below their price in 1996 when the slump began. This would imply KLAC at 18 and AMAT at 11, down considerably from todays prices. Could this happen again? Well, I suppose if orders for the second half come in even lower than the $30B number you cited, this would cause a considerable fall in price, but would make the recovery even stronger, and would accelerate the recovery of WFR and the semis themselves. The net result is that our long standing prediction that the wafer companies should recover before the semi-equipment companies could come true this time around. Any comments on these thoughts? Thanks, Carl