I'm Sorry I Mentioned It ...

Wow! Did I ever get a grilling during SEMICON West about the content of my last column! Most of my conversations started out this way: "Business is good, but our stock is doing terrible." Then, a question about my comments on overheating was raised, "So Carl, you think we're overheating? Is this the end?" From there I heard this: "If it is overheating, we don't see it. Everything looks fine at our business!"

A few of those conversations took place before Merrill Lynch dropped its ratings on the chip industry. As you all know, that bombshell was released on the opening day of the show. A few of those conversations took place later in the week.

I tried to explain that it's not just an overheated industry that has investors worried. The market is concerned about a slowdown in the world economy, rising interest rates, higher oil prices, global wars and Presidential elections. There are so many cross-currents that it's hard to forecast what will happen next. Investors are saying, "Why subject our money to these risks?"

All too often I found myself defending a position that even I find hard to appreciate.

With Wall Street sentiment toward the chip industry decidedly negative and the possibility of seeing more seasonal slowing, something that is likely to grab headlines during August and September, the stocks could continue to march to lower lows. The Bears have grabbed their trumpets and are parading investors toward the exits.

I don't think anyone can accurately predict what is going to happen to chip-related stocks over the next few days or months. Today, the market is pushing valuations to levels that are quite reasonable. Charts tell me the stocks are oversold. They also say there is little support for prices.

How low can we go? Could we go to the '02 lows? That's a very difficult question, and any answer I give would only be a guess. In the near term, all we can do is bite the bullet and weather the storm. Longer term it's easier, so let's move past this trouble spot and look out a bit.

Earlier this year, I mentioned I was looking for chip industry action to mirror the seasonal tendencies of the past. That means some late summer slowing in the equipment ordering process, followed by another seasonal ramp. This is normal, and by no stretch of the imagination does it imply that the cycle is over. Late this year, past the seasonal tendencies and the elections, we will see investors step up to the plate. If I am right about this cycle, their interest will be enhanced by the resurgence of end demand.

Of course, this whole outlook turns moot if we slide into a long period of weakening end demand. The macro-economic outlook (I am writing this in early August) is somewhat disconcerting. Those inventory issues that some of the chipmakers have cited on their conference calls are troubling, and they must be monitored. Frankly, I am not that surprised by some inventory buildup. I mean, if you operated your business on a lean and mean basis for three years and all of sudden demand started picking up, wouldn't you eventually break down and put some inventory on the shelves? I would.

Other predictions: I have a hunch that during the next 12 months we are going to see a host of mergers and acquisitions in the chip equipment business. I also believe that equipment players, large entities in particular, will address the service side of the chip production process with aggressive campaigns. The goal here is to attach the business model to the growth in millions of silicon square inches and unit volumes. I think those that are successful in this arena will turn into the long-term winners.