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Technology Stocks : Micron Only Forum -- Ignore unavailable to you. Want to Upgrade?

To: Fabeyes who wrote (45488)	4/30/1999 12:40:00 PM
From: Fabeyes	Read Replies (1) \| Respond to of 53903

The Fool speaks. FOOL PLATE SPECIAL An Investment Opinion by Dale Wettlaufer Challenges in Thinking about Chip Equipment I find the latest cycle in the semiconductor chip equipment industry very interesting. The latest round of price run-ups in the stocks of these companies was kicked off in part by an improved outlook for DRAM manufacturer Micron Technology (NYSE:MU - news) . That has stalled out, though, as the price outlook for DRAM has moderated. This again points to the rule of chip densities and prices. The rule is that chip densities increase and prices per circuit go down. The exception is stable to higher prices. I really think the 1991-1994 time period has warped people's perceptions on that one. Not that you can't make money in an industry where unit growth is high and prices are dropping, but when your competition consists of other nations -- by that I mean enterprises that get direct or indirect financial support as a course of national fiscal policy -- it's pretty darned tough to compete effectively. This should make things work nicely for suppliers of chip fabrication, testing, and assembly equipment, but it doesn't work in such a linear fashion. If you pack three times the amount of chips on a wafer and wafer yields improve (the number of good dice per wafer increases), the number of wafers processed doesn't increase in tandem with the end-unit increase in semiconductor consumption. Mitigating that, larger wafer sizes do necessitate new wafer processing equipment, leading to a new spare parts and service annuity stream. Smaller semiconductor feature sizes demand more precise wafer probing equipment, more dice produced require more assembly equipment, and finer feature sizes require better yield enhancement equipment and photolithography equipment. What this all means is that you can't just extrapolate end-market growth into the sales and cash flows of the companies in this sector. There's a lot of specialized knowledge required here, and that's not so much attained through paying a ton of money to get it, but through disciplined research. In other words, don't just assume Lam Research (Nasdaq:LRCX - news) is in the same competitive position as Applied Materials (Nasdaq:AMAT - news) , because it isn't. KLA-Tencor (Nasdaq:KLAC - news) or Cymer (Nasdaq:CYMI - news) are going to be affected a lot differently by trends in materials sciences than, say, Kulicke & Soffa Industries (Nasdaq:KLIC - news) . Bidding stock prices on the latest book-to-bill (BTB) isn't the answer, either -- not when the components of book-to-bill are ignored. If bookings are down 50% and billings are down 45%, sure, you might end up with a super-1.0 BTB ratio, but you don't put ratios in the bank. You put dollars in the bank. Single-point analysis, such as looking at the book-to-bill and not the components of the BTB on a multi-year continuum, or pricing a company in this industry on just one year's expected earnings without doing a multi-year discounted cash flow analysis are analytical methods that are going to lead you into trouble. Having an undeveloped worldview on the ecosystem into which these companies fit is also going to handicap you against the lead steers in this industry. If you're trading the trend here, you're at the mercy of sudden inflection points that occur in technology-driven industries. I guess you can recover and shift your trading hypothesis, but for investors, I don't have any idea how anyone can get involved without developing a larger framework and valuation methodology. Slapping a P/E on estimated year 2000 earnings and then pricing a company and an industry off historical valuation points is definitely not valuation work.