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Technology Stocks : Semiconductor Industry Sales Trends -- Ignore unavailable to you. Want to Upgrade?

To: Michael Sphar who wrote (66)	8/27/1998 12:37:00 PM
From: Michael Sphar	Read Replies (1) \| Respond to of 105

From a friend I received this interesting and quite bearish report. Note the yield and unit count numbers buried within, interesting for future extrapolations. From TECH INVESTOR: Semiconductor Market Focus No Patience Monday, August 24, 1998 In the past three weeks we have seen Wall Street move from optimism to pessimism about the device-manufacturing business. Early in August, seasonal ordering stimulated a bit of a relief rally. Christmas comes every year, so this should not be a surprise. A few bulls have pinned their hopes on the recent firming of memory prices. The move in memory prices is the result of leaner inventories in the reseller channel and a transition to 64-megabit Dynamic RAM production. In the 64-Mb arena, we are expecting prices to continue dropping in the coming months as numerous production lines mature with the product. Die sizes are shrinking and yields are getting very high. This drives costs down, and prices will soon follow. We have heard the largest and most active joint venture in the United States is seeing yields of up to 70 percent on 64-Mb DRAMs before laser repair. After laser repair, yields rocket to over 90 percent. Folks, this is not a trailing edge process. These DRAMs are being made with a 0.18-micron process, generating 550 64-Mb dies per wafer. Soon, the joint venture will move to 0.15-micron and then 256-Mb DRAM production. Don't be misled by the recent pop in prices, the capacity glut is still with us. In Japan, it appears 64-Mb inventories are already accumulating. The grope for the elusive bottom continues. We really hate being bearish, but the signs are not good. As we said in our last article, "Shareholders will likely tire waiting for the next upturn and [semiconductor stocks] could make new lows sometime this fall." Looking at Friday's action it becomes obvious that Wall Street is getting tired of waiting for the upturn. Many investors will say that because we have been in a bear market for semiconductor and semiconductor-equipment issues we have to be close to the bottom. It is our belief that a pronounced period of low shipment levels will coincide with lower stock prices. Unfortunately, visibility is not going to emerge until a number of the financial dislocations pass. The big-picture view is also cloudy. "The economic fundamentals that led to the correction are still very much in place. Indeed, they are getting worse," said Bruce Steinberg, chief economist at Merrill Lynch. He expects the global slowdown to last well into next year. This will take time -- probably a long time. Infrastructure's "Fab Rat" has worked closely with many Japanese semiconductor and semiconductor-equipment companies over the past 30 years. Some of his recent comments fall in line with Mr. Steinberg's analysis, "It took many years for Asia to get to the present condition and it will take many years for them to get out. Just because the collapse was rapid does not mean the recovery will occur at a similar pace," he said. On the heels of a bullish forecast released a few weeks ago, the Fab Rat said, "After looking at the Global Sales Report it is apparent to me that all of the upside forecasts are dependent on a recovery in Asia. Therefore, any realistic forecast has to address the issues in Asia. I don't see forecasting in a vacuum. It would be unrealistic to say PCs are going to do fine unless Asia is also doing fine." Of course, there are a few who are doing well in the PC space -- how about Dell Computers [DELL]? We have maintained that a recovery in the semiconductor business will evolve in the form of a U shape. The trough of the U will be agonizingly painful. Many companies will go out of business. Many companies will be acquired by larger players. Sales will appear in spasms. Visibility will be low. The trough could easily last in to the very late months of 1999. Allow us to elaborate on what we are hearing about the equipment business. Contacts in the field continue to suggest conditions are deteriorating much more than current earnings reports depict. In addition to the weak level of orders and shipments, companies are being forced to assess the impact of the year 2000 problem in existing manufacturing facilities. The same state of denial that plagues others with Y2K exposure is alive and kicking in the chip-manufacturing business. Interestingly, our research indicates the Y2K problem is being aggressively addressed by companies that are not household names. The ones we see looking for Y2K solutions are run under the umbrella of large conglomerates -- fabs that build custom parts with less than state-of-the-art wafer process tools. We have had conversations about Y2K with some of the largest companies in the semiconductor business and it is apparent they have only begun to study the impact. (Admittedly, Texas Instruments [TXN] appears to have done a great deal of due diligence.) We are not going to describe the Y2K impact as complete doom and gloom, but it is serious enough that we feel a concentrated effort -- an effort so concentrated it will continue to sideline new construction plans -- must transpire over the next 12 months. In upcoming issues of our monthly letter we are going to try and address many of the Y2K issues faced by the industry. Yes, it is a long list and it will take a good part of the year to detail the full story. This week, wet blankets were tossed on semiconductor bulls by National Semiconductor [NSM], LSI Logic [LSI] and Analog Devices [ADI]. There are others who are struggling with the lack of orders, but these three were the most visible this week. The report from Analog Devices highlights the weakness in the automatic test equipment sector of the semiconductor-equipment industry. The drop in bookings at Teradyne [TER] and Credence [CMOS] only highlights a portion of the weakness in ADI's outlook. The ATE sector is not a huge market for ADI, so other areas are suffering too.