ED’S THREADS: SEMInvest panel bullish on torpor

by Ed Korczynski

Yesterday SEMI held a SEMInvest breakfast panel in Palo Alto CA,, and at one point the analysts seemed to be saying that we were too popular, so no one liked us anymore. Moderator Bruce Rhine — fresh off the success of selling another company (this time Accent Optical to Nanometrics) — led the panel in discussing why the biz looks good but not so great these days. Large original equipment manufacturing (OEM) companies’ stock prices are not expected to outgrow the S&P 500.

Despite the lackluster forecast for stock prices, underlying business seems solid. Global semiconductor industry capital expenditures on specialized OEM tools should be near $47 billion in 2007, followed by $51 billion in 2008, according to Jay Deahna, managing director, semiconductor capital equipment, JP Morgan. Deahna said that orders by logic IDMs have already peaked for this cycle, orders for memory production particularly DRAM will increase, and NAND flash is only now slowing after 100% growth year-on-year in 2005. The foundry capacity utilization average low for the current cycle may be only ~85%, and such a high trough should stimulate a strong next growth period.

The semiconductor industry has always dealt with cyclical demand, but the time-scales have shrunk significantly over the decades. The first big customers for ICs were governments, particularly military departments, and cycles occurred every ten years with new contract wins. The next big customers for ICs were corporations, and cycles occurred every five years in sync with capex depreciation.

Today, everyone agrees that individual consumers are the big customers, and demand cycles occur every year or two based on planned obsolescence, fickle whims, and global macroeconomics. Robert Maire, semiconductor capital equipment, Needham & Co. observes that consumers driving demand means that in addition to supply/demand balancing we must now also consider seasonal demand patterns. For example, a large portion of consumer electronics spending occurs in the month of December.

Avinash Kant, VP of equity research, advanced semiconductor, Canaccord Adams, is long-term bullish on the capex market, due to shorter and less severe OEM buy cycles, and an expected steady unit demand for ICs. Gary Hsueh, senior analyst, semiconductor capital equipment at CIBC World Markets, tried to make bear noises in a talk called “Don’t rush to call a shallow bottom.” He noted that OEM stocks in 2006 have underperformed the S&P 500 by 6%, though he does expect a 20% global capex increase next year. Maire added that the cyclical volatility remains inherent to our industry, which accounts for our discounts versus the S&P 500.

The industry has matured to the point that it no longer fits into a “growth” category for investors — torpid growth in stock prices is why no one is very upbeat. Deahna said stocks don’t really move upward unless hedge-funds and other funds make sizable investments, but Maire said hedge funds are much less interested in this space — “What’s the point of investing in AMAT at 17 [dollars/share], when the one year target is only 21?”

Larger broad-line companies are expected to merely perform to the industry, so smaller single-line companies appear relatively more attractive. Deahna believe that when Intel’s 45nm capex pie is cut, larger slices will go to ASML, Lam, and Varian. Yield management and metrology companies will generally do well since manufacturing just keeps getting more complex. We must all hope that Microsoft’s next bloatware is finally released sometime in 2007 so that it can inevitably suck up vast quantities of DRAM — but meanwhile our inner Extreme Elmo is dancing to our clip-on iPod. — E.K.


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