Longing for the Good Old Days

Ah... SEMICON West in the '90s. Those were the good old days. San Francisco's Moscone Center would fill with people from the chip business. A tour of the halls allowed you to see all the latest and greatest IC capital equipment. This still goes on, but the numbers — people and tools — are certainly smaller and the enthusiasm is a bit muted.

I suspect that this year's show will be very interesting. Not so much to hear the latest stories about larger wafers, new tools and new processes. What I think will be most interesting is the overall sentiment. Right now, times are pretty rugged in the chip business. Glimmers of hope, which have punctuated this very long downturn several times, have always been squashed by some external event — the bust of the Internet bubble, September 11, the Iraqi War and now SARS, to name a few. Of course, the general weakness in the world economy is not helping the situation. Economic weakness is something we've had to deal with on an ongoing basis.

Chip units up, average selling prices (ASPs) down. Hot off the press is the latest release from the SIA with data regarding April semiconductor sales. There's a good news/bad news story: Unit volumes are clipping along at a decent rate. Despite a little dip, one can say that we're almost back to the run rate recorded during the last cycle peak. ASPs, on the other hand, have fallen to levels not seen since the early '90s. Ouch. Profitability at these price points is difficult to fathom.

Some of the pundits I talk with are telling me that there was a bout of inventory building in the first quarter of this year. The theory here is that the Iraqi War and SARS caused chipmakers to stockpile some product. By the time we get to SEMICON West, we'll know if this inventory is moving out the door. I would bet, given the weakness in ASPs, that products are not selling as well as forecast.

Equipment companies are still treading water. There really is no visibility in the sector. We've seen sporadic buying and shipping of equipment, primarily for back-end processes and the filling out of existing production lines, but no serious momentum. In April, I attended SEMI's Strategic Business Conference (SBC) and heard a wide-sweeping message that something has to happen to the current business model or the industry will stay stuck in a rut. Some of the discussion from SBC is sure to carry on to SEMICON West.

Back here in the month of May, Wall Street has decided it is time to buy stocks. They're not just buying chip and chip equipment stocks; they're buying most of the flavors available. The popular averages are within shouting distance of the levels posted in late 2002. Clearly, Wall Street is hoping that the oft-talked-about end-of-year recovery takes hold. I'm probably more worried about the end of the year than most. Right now, I am enjoying the rally. I do have one foot in the exit door if the recovery turns out to be another false start.

Let's be happy that we have a chance to finally make some money. Maybe it is tough in the real (semiconductor) world, but our stocks have moved higher. It would not surprise me to see the stock market peak shortly before SEMICON West. If we get into July and it looks like the momentum will continue, I only take a little off the table. Then again, if the data continues to look like it does today, I may have to really pull in my horns. "Nimble" sounds like a nice word to use to describe my investment strategy for the summer months. Hope to see you at the show!