Found this rusting jem in the NY Times archives. It's comforting to know that everyone was just as confused in the past as they are now.
February 15, 1996
Excess Inventory of Chips Seen as Mixed Signal
By LAWRENCE M. FISHER
SAN FRANCISCO -- After four years of double-digit growth, the semiconductor industry is asking whether it can defy gravity much longer. The answer is far from certain, considering the conflicting fortunes of two bellwether companies.
Late Tuesday, Cirrus Logic Inc. forecast a net loss for its fourth quarter, which ends on March 30, and revenues lower than those in its third quarter. Its shares plunged $3.625 Wednesday, or 15.6 percent, to $19.625 on the Nasdaq. The company makes a wide variety of chips.
On the other hand, Applied Materials Inc., the leading producer of equipment for making semiconductors, announced record results late Tuesday for the first quarter, ended on Jan. 28, and said that orders remain strong.
Shares of Applied Materials rose 62.5 cents to $39 in Nasdaq trading. Applied Materials said that first-quarter net income rose 161 percent to $172 million, or 93 cents a share, from $65.8 million, or 38 cents, last year. Revenue also more than doubled to $1.04 billion from $506.1 million.
The divergent reports came just days after the Semiconductor Industry Association reported that its main indicator of business conditions dropped to an unexpected five-year low in January. That indicator, called the book-to-bill ratio, declined to 0.93, meaning that for every $100 worth of chips shipped, only $93 worth was ordered. That indicated a slowdown in sales, the trade organization said.
Some analysts said Wednesday that the conflict between the reports was not meaningful, because Cirrus Logic and Applied Materials are in such different businesses. Cirrus makes chips for PCs, and is directly affected by slower-than-expected PC sales. Applied Materials supplies the equipment to make chips, which it sells far in advance of the chip production and is therefore less influenced by short-term cycles.
"The economics driving the semiconductor equipment companies has almost nothing to do with the semiconductor companies," said Michael Murphy, publisher of the California Technology Stock Letter.
Equipment purchases "have much longer lead times, and are driven in large part by the need to upgrade process technology," Murphy said. Chip makers need new equipment "to get into the 21st century, and they are not about to hold back because the price of memory has fallen."
But the projected loss at Cirrus and the decline in the book-to-bill ratio are important, Murphy said, although he said that he suspects the latter was distorted by the chip association's methodology.
Slower PC sales in the final quarter of last year led to excess inventory, he said. "It hurt the December quarter, and will hurt the March quarter some, but I think it's about over," he said. "We're buying the stocks, wherever it makes sense," said Murphy, who also runs investment portfolios.
But Rick Whittington, an analyst with the Soundview Financial Group, took a bearish view, saying that Applied Materials's healthy order rate now would only cause excess chip capacity in the years to come.
At Cirrus Logic, the question was how long the slowdown would last. "If PC unit growth doesn't increase in the first and second quarters, then by the second half of the year we will be in a miserable position of oversupply," Whittington said. "Semiconductor stocks have lagged the broad market for so long that customers want to buy them, but what they're ignoring is this tremendous capacity addition going on. I have to conclude we are on the verge of a 1985- to '86-like disaster," he said. "Sell the stocks."
In 1985 and 1986 Japanese chip manufacturers slashed prices on commodity chips, like dynamic random access memory chips, or DRAMs, in an effort to gain market share. Although the United States imposed sanctions against Japan for "dumping" their products, it had a devastating effect on U.S. chip makers.
With companies in Japan, Korea, Taiwan and other Asian countries now buying equipment capable of making a broad range of chips, the stage is set for oversupply across the industry worldwide, Whittington said.
Dan Niles, an analyst with Robertson Stephens & Co., said he was more positive, at least in the near term. He said the excess of memory and other chips, coupled with Intel Corp.'s recent price cuts on Pentium microprocessors, would lower prices on personal computers. Price cuts on powerful PC's would likely prompt corporations to upgrade from older machines, Niles said.
"You could see a pretty strong second half of the year," Niles said. "This is not the end of the world." |
