Think Small
Carl Johnson, INFRASTRUCTURE -- Semiconductor International, 2/1/2000
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INFRASTRUCTURE
I am writing this from the Consumer Electronics Show 2000 (CES) in Las Vegas. Next week, I will attend the Industry Strategy Symposium (ISS) in Monterey, Calif. During my travels I will hear what industry participants and pundits have to say about the coming year. In future articles I hope to share some of their insight.
As everyone can attest, big changes are afoot in the technology industry. Semiconductor content permeates every facet of our daily lives. Today I was standing in line waiting for a taxi but was able to send e-mail and check stock quotes via my Palm VII. Amazing piece of hardware -- very functional. This trend toward portable, wireless communications is bound to accelerate. Palm seems to have a very good handle on what the market demands.
During the last few months of 1999 demand for semiconductor devices swelled to record levels. Some will say Y2K stockpiling drove the growth. Some say there was double booking in many components because of the Taiwan earthquake. To me, over-emphasizing these short-term phenomena causes one to miss the big picture. While I am at CES many parts of the picture will be exposed. The products hitting the market today will continue to propel revenues and earnings much higher. Probably higher than many expect....
But there is another item that makes me really optimistic: The semiconductor industry has under-invested in new capital equipment and facilities for close to three years. Capacity is tight, and new technologies, like copper and 300 mm, require massive investment. These are really big drivers.
With all the volatility on Wall Street we're searching hard for investments with reasonable risk-reward ratios. One of my analyst friends, Byron Walker from Warburg Dillon Read, has been studying the valuation discrepancy between large, high-growth semiconductor companies and the semiconductor equipment industry. Interesting stuff. One cannot move without the other, and one would think they would move in sync. Not true. Right now the semiconductor equipment companies, especially the small and mid-sized ones, look like the best value in the market.
Last month I mentioned some of the smaller issues in the semiconductor equipment world. So far those holdings have paid off handsomely -- even during the recent market correction. While the market is blowing the froth off the big-name stocks, the little players are starting to move to the upside. This is to be expected as the cycle evolves.
Some mid-cap issues deserve recognition. In the past few weeks we have heard that business is very good at back-end (test, assembly and packaging) companies. At INFRASTRUCTURE we've been optimistic about back-end firms because data suggest this area has been grossly under-represented in capital spending programs. When you hear Orient Semiconductor is buying 300 wire bonders from Kulicke & Soffa, you know this is true.
The back end is a good area to focus on for the coming months. Any signs of slowdown in the industry will show up here first. Orders are unit driven. Lead times are short and volatile. If the current growth rate in the semiconductor business is going to continue, companies that participate in back-end manufacturing will see heady growth. We are exposed to Kulicke & Soffa, Teradyne, Electro Scientific Industries and Micro Component Technologies to capitalize on this trend.
Carl Johnson is president and co-founder of INFRASTRUCTURE (www.infras.com). He can be reached by phone at 1-972-492-7208.
