Why Now Is Not the Time to Own Semiconductor Stocks

This is not time to own semiconductor stocks, either chip makers or equipment manufacturers. According to the Semiconductor Industry Association, worldwide sales of semiconductors were $14.2 billion in February, a decline of 30.4% compared to February 2008 sales of $20.3 billion. This is a continuation of the decline observed from the prior year. Sales were down by $1.1 billion from January 2009 levels of $15.3 billion.

The global semiconductor industry is going through one of the steepest corrections in its history,' said SIA President George Scalise. 'While it would be premature to conclude that the sales have hit bottom, there are some indications that the rate of decline has moderated from the final quarter of 2008.'

'Demand for semiconductors is likely to continue well below 2008 levels for the next few quarters with a gradual recovery to follow as the global economy recovers,' Scalise concluded.

There are similar problems within the semiconductor materials market. The materials market was flat in 2008 as compared to 2007. Semiconductor materials market sales reached $42.7 billion globally in 2008. The industry group for the semiconductor materials market, SEMI, reports that "the wafer fabrication materials and packaging materials $24.1 billion and $18.8 billion, respectively." These sales figures represent a decline from 2007.

SEMI has also reported that worldwide sales of semiconducting manufacturing equipment totaled $29.52 billion in 2008, representing a "year-over-year decline of 31 percent."

"The global wafer processing equipment market segment decreased 31%; the assembly and packaging segment decreased 28%; the total test equipment sales decreased 32 percent. Other front end equipment sales declined by 32 percent"

We believe the market is discounting the recovery somewhat ahead of itself. It remains to be seen if the global economy will pick-up before 2010. Even if it does, the semiconductor market may lag the recovery.

The companies we have on our watch list, Altera Corporation (ALTR), Analog Devices (ADI), Intel (INTC), QLogic Corporation (QLGC), Taiwan Semiconductor (TSM), Texas Instruments (TXN), and Xilinx (XLNX), are priced as though the recovery is already here. Sales and earnings will continue to decline through 2010. We would wait until there are signs of recovery before being buyers of semiconductor stocks.

Disclosure: Author has no financial interest in any company mentioned in this post.

Comments

[Smart1:]

I see, the time to buy stocks is when earnings and revenue are at record levels.

Apr 06 01:42 PM

[techexprt:]

Inventory level is at all time low. This is why the semi stocks have gone up. Wait till the earning report from Intel next week. One will regret NOT owning any semi stock. Try comparing the stock price of semi stocks for 2008 and 2009. Don't be fearful.

Apr 06 10:51 PM

[_Jimmy_:]

"Sales and earnings will continue to decline through 2010"

You need to define what you mean. QoQ, YoY? Either way you are making an assumption that is very unlikely. Do you believe that Semi sales in Jan 2010 will be lower than Jan 2009?

"We would wait until there are signs of recovery before being buyers of semiconductor stocks"

I am not sure that anyone can take any of your arguments seriously after reading this statement. We have some signs of recovery now. Look at the bits coming out of foundries. Uptick in memory prices. Why are these not the correct signs? By the time you are certain of recovery, there will not be much upside left.

Apr 07 08:24 AM

[Ron Sommer:]

Yes, I do expect semi sales to be less in 2010 than in 2009. I could be wrong, of course, but I think the recovery will start later than many expect. Further, the "bits coming out of the foundries" are just that. I don't think there is sufficient data available yet to draw conclusions about performance in 2010.

I don't think the picture is black either. Some companies clearly will do better than others. I see a strong rebound for Intel (FY10 EPS of $1.73), QLogic (FY10 EPS of $1.42), Taiwan Semiconductor (FY10 EPS $0.92), Texas Instruments (FY10 EPS $2.12) and Xilinx (FY10 EPS $1.67). I expect Altera and Analog Devices to be down from FY08.

The point is Intel is now selling at 17X TTM EPS, 40X Est. FY09 and 19X FY10 consensus estimates. If these estimates are reasonable, is now the time to buy? My own estimate, as you can see, is much higher. If I am right, the Intel is selling at 9X my estimate. At $15-$16, I think Intel is fairly priced even considering my higher estimated EPS for 2010.

I would posit that these same arguments are appropriate for the other companies mentioned in the post.

Apr 07 12:20 PM

[huangjin:]

What did you think of TSM at 6 and INTC at 12?
I think the market rallied ahead of itself, but if there's no recovery this year (my personal expectation, though I expect the stimulus to goose official numbers for a quarter or two) stocks may sell-off and semis might be oversold in a bear rampage.

Apr 08 05:01 PM

[Ron Sommer:]

If you read this article from Reuters, www.reuters.com/articl..., quoting Craig Barrett, Chairman of Intel, my argument that chip stocks will not see sales increases, let alone earnings increases, in 2009 are substantiated.

TSM at $6 is no bargain; Intel at $12 provides to the current level which I think is fair value.

Apr 09 09:20 AM