In a modern day version of “The Emperor’s New Clothes”, the semiconductor equipment market again, as in 2000, combined two years of growth into one. Unwarranted, unsustainable, and unrealistic growth, when based on the underlying current global macroeconomic woes, drove revenues well over 100% over 2009.
"The Emperor's New Clothes" is a short tale by Hans Christian Andersen about two weavers who promise an Emperor a new suit of clothes that are invisible to those unfit for their positions or incompetent. When the Emperor parades before his subjects in his new clothes, a child cries out,
But he isn't wearing anything at all!
The Emperor realized that the people were right but could not admit to that. He though it better to continue the procession under the illusion that anyone who couldn't see his clothes was either stupid or incompetent. And he stood stiffly on his carriage, while behind him a page held his imaginary mantle.
Forward to 2010 with the focus on the semiconductor equipment space. In our analogy, the Emperor is cast as executives at IC manufacturing companies, while the two weavers are the analysts, touting explosive growth in semiconductor equipment based on “pent-up” demand for memory and other IC devices. We give these analysts the benefit of the doubt that they did not make their forecasts maliciously, but on our opinion they did so with out foresight, based on the fragile economy . Sadly, every analyst seemingly tried to get their name in print by upping the forecasts throughout the year.
Back to our plot. The Emperor (IC executives), being smart business people in order to get to the top of the IC firm, should have realized from past experiences that they were being duped. Why? Because their own internal due diligence should have warned them. Instead, not to look stupid, or unfit for their position, they went along with the analysts’ forecasts, compressing two years of equipment purchases into one.
We cast ourselves in the role of the child. We have been crying out since the start of the year that the forecasts were not supported by the economy, but our voices went unheard by all the citizens of the empire, whom we cast as IC manufacturers, equipment manufacturers, analysts, and stockholders – all in denial that Wall Street did not resemble Main Street in the least way.
We pointed our in an article on August 16 in Seeking Alpha Repercussions of a Deteriorating Semiconductor Industry and in other press outlets of ours that the market was overbought and not sustainable. For example, we were quoted in other media outlets back on June 28 – “Watch For A Slowdown In Semiconductor Equipment Sales” and again on August 10 – “Semiconductor Equipment Pushouts Imminent”
SEMI announced its latest book-to-bill ratio last week. Pretty dismal!. Bookings were down from $1,837 million in July and $1,816 million in August to $1,616 million in September. Keep in mind that these are THREE MONTH AVERAGES. So if you look at the strong performance in July and August, September must have been in the loo.
First the semiconductor equipment bookings drop, then equipment pushouts will follow. Unfortunately we need to deal with the egos of the Emperor, if we go back to our present day story. Remember that the
Emperor thought it better to continue the procession under the illusion that anyone who couldn't see his clothes was either stupid or incompetent. And he stood stiffly on his carriage, while behind him a page held his imaginary mantle.
Pushouts are necessary for the bottom line of a semiconductor company over the next several quarters, something the Emperor should have realized in our opinion a few quarters back
And of course there is another analogy we face in the economy. If a company is doing great, its because of the genius of the CEO and other executives. If not, it’s the economy stupid.
AMAT, AMD, APD, ASML, AVZA, CAJ, OTCPK:FJTSY, HPQ, INTC, MU, NVLS, OMG, OTCPK:TOELF, OTCPK:TOSBF and other IC, equipment, and material suppliers have or will be announcing soon. Nearly all will point to a slowing in the next quarter in their releases and conference calls. It will get worst in the following quarter.
Disclosure: No positions