Here is a brief selection of items to give you a flavor of what’s been going on lately:
- Intel (INTC) started the ball rolling in earnings season by surprising everyone with a blowout quarter and positive forward guidance.
- Kulicke & Soffa (KLIC), a chip-equipment company, reported good earnings and a positive outlook
- Broadcom (BRCM) had a good quarter but offered dismal guidance
- Teradyne (TER) had a strong first quarter but warned the second quarter might be more challenging
- Novellus (NVLS) is pretty much in the same boat with Broadcom and Teradyne
- Applied Materials (AMAT) announced they are buying Varian (VSEA) so it’s clear that AMAT certainly sees potential in the chip sector
Gartner – the glass is half empty
A couple of months ago Gartner forecast that PC sales will grow only 10.5% in 2011, which is down from a 15.9% prediction from November 29 and 18.1% prior to that. In their view, the primary reason is a major slowdown in notebook sales from the 40% growth rates we have seen over the past few years, to only about 10% this year. This is considered to be a serious reason for pessimism on semiconductors and the company thinks it may limit growth in chip sales for the year to a modest 4.6 percent.
In other analyst reports, research firm International Data Corp. predicted that the chip market would grow 9 percent in 2011. VLSI Research Inc. said it expects chip sales to grow only 4.4 percent in 2011.
IC Insights – the glass is half full
On the other hand, we have IC Insights pointing to the fact that sequential growth in chip sales was slightly positive going from Q4-2010 to Q1-2011. This doesn’t sound like much, but growth over these two quarters is typically negative and has averaged -1.2% over the last 18 years. Given the seasonality typically seen in the semiconductor sector, mildly positive growth at this time of year is actually more important than it might seem. IC Insights goes on to say that in years where this positive growth phenomenon has been observed, full year annual growth has typically been at least 11% and has often been much stronger.
Here is the chart of those years where Q4-Q1 growth has been positive (click to enlarge):
Investors should keep in mind that annual chip industry seasonality usually progresses like this: weak first half of the year followed by a strong second half.
In the meantime, some chip companies are following the standard script, some are deviating somewhat from expectations by showing good Q1 earnings reports but cautious Q2 outlooks while others are surprising to the upside. In other words, a consistent theme is difficult to find.
What does seem to be consistent is the continued growth in bandwidth use both in mobile and non-mobile. As Intel showed, whether PC sales decline or not, the demand for servers to support all the data flowing through the global telecommunications, enterprise and Internet infrastructure is unlikely to wilt. And that will provide a prop for semiconductor sales even if the new, white iPhone (AAPL) doesn’t meet sales targets.
Add in the slow but steady improvement in the economy as another positive for the chip sector and I find myself leaning toward the same view offered by IC Insights: the glass is half full.
Finally, the chip sector proves there is still some excitement in tech. Just yesterday Intel announced that they had managed to figure out how to mass produce 3-D “tri-gate” transistors. This 3-D design, first announced a couple of years ago, is expected to usher in a new period of faster, lower power chips that might finally make Intel competitive in the mobile space and in the meantime provide an enhanced power/performance ratio for all other users.
With the iShares Semiconductor Sector ETF (SOXX) roughly 7% off its recent high, this could be a pretty interesting time to think about buying. The ETF sits just above where its 20-DMA and its 50-DMA are intersecting. I expect SOXX to test that level and drop below it. A move back above roughly $59.50 would confirm in my mind that the near-term decline in the ETF has run its course. With the second half of the year expected to be strong (at least for some companies) the current bout of weakness could be a good buying opportunity.
Disclosure: No positions in any stocks or ETFs mentioned in this article.