Never Surrender! Never Give Up!
Carl Johnson, INFRASTRUCTURE -- Semiconductor International, 3/1/2001
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Last month I ventured out on a limb. I made the bold suggestion that investors would toss in the towel sometime this quarter because business conditions in the semiconductor industry were getting worse. Oops. I was wrong. Well, I was right on the business front and eventually I might be right about the stocks. Eventually.
Personally, I thought the reams of data I have to support my assessment of the business front would position me perfectly. I'd be able to capitalize on the turn when the data started to show signs of a bottom - just like it has done in the past. Unfortunately, the money management crowd and many of the Wall Street analysts decided to throw down the gauntlet. Fearless, they are embracing the Alfred E. Neuman approach to investing: "What? Me worry?"
While the hard numbers are decidedly negative, our friends on Wall Street have etched the second- half recovery in stone. The facts to support this are very much open to debate. I see the outlook for this year's semiconductor and semiconductor equipment industry as more muddled than it has been over the last five years. Mind you, muddled does not mean the end of the world, but let's face the facts - we just witnessed a year where semiconductor equipment shipments rose 88%! The last time this happened was during the mid-1980s, and the industry went into a two-year downturn. Not that I am predicting a two-year downturn. All I am saying is that the years following 80+% up years are typically pretty lean.
Those of you in the capital equipment business can probably relate to what I am talking about. We all know the industry is cyclical. We know that there are drivers in place for the next capital spending upturn: 300 mm wafers, copper interconnects and new packaging techniques, to name just a few. Wall Street knows this too, and that is part of the reason they are buying today. Whether or not these drivers kick the industry into a gear that justifies current valuations is another story.
What is interesting about this cycle is the weakness in final demand. One has to wonder what will really stimulate the end markets. To me, this is the most crucial element of the cycle equation. Granted, one can use the same "second-half recovery" theme to support a pick-up in end demand later this year. It's easy: Lower interest rates and a tax cut will provide everyone with a little more money to spend. That'll work. But in the big scheme of life, the impact of external stimuli will not change the fact that the drivers of yesterday are not what they once were. The industry needs to develop the next killer app to really get things moving. I'll talk about this in a future issue.
I know all too well that worrying about the depth and duration of this downturn is moot if the stocks keep moving up. We are in this business to make money, so fighting an equity up trend is an exercise in futility. As I said last month, "Buy when they're down, sell when they're up. Mix in a little fundamental analysis, stay in tune with the cycle and it all works out."
Carl Johnson is president and co-founder of INFRASTRUCTURE (www.infras.com). He can be reached by phone at 1-972-492-7208.
