Double-Edged Swords
Carl Johnson, INFRASTRUCTURE -- Semiconductor International, 6/1/2001
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If it were only so easy.
We can only wonder where semiconductor and semiconductor equipment stocks would be trading if it were not for the rapid drop in interest rates. The fundamental story is certainly nothing to write home about.
Ah, the fundamental story. What about it? As those of you in the industry know, the chip business is entrenched in one of the nastiest downturns of its short history. It does not appear that the industry is going to bounce back in the immediate future. Today, the fashionable thing to do in analytical circles is to predict the bottom. For the capital equipment industry, that's not that hard to do. I can state this rather plainly: "The capital equipment industry will bottom when we reach a run rate that equals technology buys plus the revenues generated from spares, maintenance and engineering services. In all likelihood, that bottom will come during the historically weak third quarter."
Set it in stone.
Predicting the fate of the device manufacturer is more difficult. The chipmakers' growth is inextricably linked to the health of the economy. I have pointed that out in my past articles and am moved to say that this time is no different. Perhaps the cutting of interest rates and the proposed tax cuts will rekindle the demand for semiconductor-laden products? Only time will tell.
One of my fears going into this year was that we would get a tremendous drop in interest rates and a rally in the stock market that is not supported by an improving fundamental picture. That is still my biggest fear today. I firmly believe that the technology business is going to be a good place to invest over the long term, but the next two years present a transition phase. The "free" business models we saw proliferating during the Internet boom years are no longer feasible. The telecommunications sector is going through a wrenching retrenchment - one that is causing them to focus on capital generation rather than capital expenditure. The PC business is still sloppy despite what we may be hearing from some players. Why else would Intel be cutting prices on high-end processors 50-60%? Some will argue that their yields are so good they can afford to do this. If this is the case, it would be a first. More likely, the price cuts are coming because demand is weak. At least, that's how I feel about the situation.
So what is an investor to do this summer? Although it elates me to see stocks go up in the face of some disheartening news on the business front, I feel it's necessary to move closer to the exit door. No doubt there are still profits to be had, but one must always keep in mind that valuations do matter - despite what we are hearing from several sell-side Wall Street analysts.
With that I will leave you with this thought: Be nimble. This is shaping up to be a long hot summer for the chip business.
Carl Johnson is president and co-founder of INFRASTRUCTURE (www.infras.com). He can be reached by phone at 1-972-492-7208.
