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Chip stocks crumble
July 5, 2000: 4:25 p.m. ET

Analyst's downgrade weighs on sector; others disagree with downbeat forecast
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NEW YORK (CNNfn) - Semiconductor stocks took it on the chin Wednesday after a Wall Street analyst warned of a looming slowdown in growth and downgraded his rating on the sector.

Citing what he called "slowly reversing industry fundamentals," Salomon Smith Barney analyst Jonathan Joseph downgraded his rating on the semiconductor sector to "neutral" from "outperform."

He also slashed ratings on four chipmakers. On Texas Instruments (TXN: Research, Estimates), Advanced Micro Devices (AMD: Research, Estimates) and National Semiconductor (NSM: Research, Estimates), he reduced his ratings to "outperform" from "buy." On Silicon Storage (SSTI: Research, Estimates), Joseph reduced his rating to "neutral" from "buy."

The news sent shares of those companies, as well as the broader semiconductor segment, sharply lower. The Philadelphia Stock Exchange's semiconductor index, or Soxx, fell 110.1, or 9.3 percent, to 1,070.81.

graphicNoting that it may take from six-to-nine months to take effect, Joseph said the industry now is exhibiting telltale signs of slowing growth.

In determining trends in the semiconductor industry, Joseph said he examines "top-down" indicators such as shipment growth rates and capital spending, as well as "bottoms-up" indicators such as lead times, prices and inventory levels.

"For most of this year, we have become increasingly concerned about the top-down picture, but have been reassured the upcycle was intact as lead times continued to extend, prices firmed and inventories remained low," Joseph said in a note to clients.

"The bottoms-up picture, however, went cautionary recently, apparently brought on by a slight slowing in cellular phone growth expectations and the rapid increase in capacity," Joseph added.

Chipmakers this year have gone on a capacity expansion tear in an effort to meet the booming demand for their products, especially those used in wireless communications devices such as cell phones.

This year, capital spending in the semiconductor industry is expected to 60 percent above last year's levels. In the past, peak years in capital spending have correlated closely with peak years in semiconductor shipment growth, Joseph said.

"We are currently forecasting 35 percent capex growth for the industry next year," Joseph said, referring to capital expenditure growth. "That estimate may be low, but it is unlikely that capex will grow greater than 60 percent next year, which means this year is the peak."

He also said lead times for some chips have been showing signs of decreasing pricing of components such as flash memory chips and capacitors have begun to moderate. Flash memory chips and capacitors have been at the top of the list of components in short supply in recent quarters amid soaring demand for wireless communications products.

"These two product areas are important because they are the most extreme, and we would expect will show the first signs of reversal," Joseph said.

What slowdown?

Analysts at two other brokerages Wednesday chimed in with more positive comments on the chip industry, chalking up any recent blips in the supply-demand picture to normal seasonal trends.

Chip sales typically are stronger during the second half of the year because of increased shipments of electronics devices ahead of the holidays and during the back-to-school season.

Deutsche Banc Alex Brown's Erika Klauer said she sees end-market demand for semiconductors remains much stronger than supply across all segments.

"Despite current market worries about component lead-times and pricing, we are maintaining our positive investment thesis for the semiconductor industry and continue to believe the group should be overweighted," she said in a research note Wednesday.

Klauer said she expects chip companies to turn in strong sales and earnings during the second half of the year.

Most of the companies Klauer tracks indicated that their inventories were low and their lead times were long, signaling strong business conditions for the second half of the year, she said.

"We expect this strong outlook to be reiterated during second-quarter conference calls. We expect companies to discuss a very strong outlook for second-half of 2000 and 2001," Klauer said.

Analysts at Merrill Lynch also said they see strong chip-industry fundamentals, particularly among companies that focus on the wireless communications market.

"When I go out and talk to the semiconductor companies, the majority, especially the ones supplying components into cell phones like flash, tell me supply is still tight, pricing is still firm and lead times are not contracting, they're getting longer," Merrill analyst Chris Danely said Wednesday.

"This is the seasonally slow time of the year for cell phones, and supply is still tight," Danely added. "What's going to happen in the September-October time frame when the Christmas season hits? I think you're going to see the situation get worse before it gets better."

Merrill is recommending that investors treat any weakness in the wireless-related chip stocks as a chance to build exposure to the group. Among the firm's recommendations are TI, Cypress (CY: Research, Estimates) and TriQuint (TQNT: Research, Estimates).

As for the chip stocks Salomon Smith Barney's Joseph downgraded Wednesday: TI shares fell 5-1/16, or 7.3 percent, at 63-15/16; AMD fell 9-3/4 to 74-1/2, an 11.6 percent decline; National fell 8-3/16, or 14.1 percent, to 49-15/16; and Silicon Storage shares tumbled 15-1/16 to 83-15/16, a 15.2 percent decline on the day.

Wednesday's report was the second downbeat technology-related comment to come from Salomon Smith Barney's equity research department recently.

Last Thursday, analyst Richard Gardner downgraded his rating on Compaq, the world's leading PC maker, to "neutral" from "buy" and slashed his near-term price target to $25 from $45. He cited concerns about the company's revenue and the amount of inventory held by retailers.

That report triggered a response from the company's chief financial officer as well as several Wall Street analysts, all of whom disagreed strongly with its conclusions. Back to top