Semiconductor Pricing Appears To Be Bottoming

 |  Includes: ALTR, INTC, SMH, TXN
by: William Trent, CFA

I warned most of last year that building oversupply would harm pricing for semiconductors, and the latest PPI data bear that out.

PPI for semiconductors

Pricing is the worst it has been since late 2003, which in turn was the worst it has ever been. But I think the fundamental outlook is improving, and my updated supply and demand model shows that late 2003 was actually quite a good time to own semiconductor stocks. You can never be too sure, though, so I decided to review the recent conference calls from a broad range of semiconductor manufacturers to get their sense of market conditions.

Intel (NASDAQ:INTC) is seeing a shift in where the pricing pressure is coming.

Now, as far as the pricing environment. It was a more competitive pricing environment than we thought in Q2, and we expect it to continue to be somewhat competitive which is what you're seeing in our margin outlook for the year. We believe the best defense against the competitive price environment is better product.

If you look at what's happening with us the last year, you've seen better products quarter by quarter by quarter. You've seen improved product differentiation, 45 nanometer coming out; the Penryn product family, as Paul talked about. So what you're seeing is Intel's commitment and focus to making our products better and better and better which is the best defense we have in a competitive pricing situation.

Glen Yeung - Citigroup

Andy, is the pricing pressure the same now as it has been all year? Is it getting worse or getting better?

Paul Otellini

I would say it is different, Glen. It is much more targeted now at the low end of the desktop and even a little bit of the notebook marketplace, and a year ago it was higher in the stacks in many areas.

(Excerpt from full INTC conference call transcript)

Altera (NASDAQ:ALTR) is deciding that in some cases they just won't take it anymore.

There are pieces of business that we do look at, that we do turn down, because we don't think that they are profitable today or will ever be profitable pieces of business for us to entertain. As an example in Q1 we looked at two pieces of consumer business, where the pricing expectation and requirement for the customer was not something that we could support. And so, we told the customer, we were not interested in participating in the business going forward.

(Excerpt from full ALTR conference call transcript)

Texas Instruments (NYSE:TXN) wants to avoid competition where possible.

Jim Covello - Goldman Sachs

Okay. And then maybe my final question. Just on the analog side, you guys are obviously doing a terrific job picking up share. You talked at the Analyst Meeting in very clear terms about the strategy for doing that and a lot of the share gain is kind of coming from that third bucket you described at the Analyst Meeting, the smaller customers where you have the scale and mask to you need to go after customers that maybe your competitors don’t have the same scale and mask to go after. What kind of competitive response are you expecting from the rest of the analog industry, as they try and stop you guys on your continued share gain impact? Thanks a lot.

Kevin March

Jim I guess, I would comment on that, we have already been seeing competitive response but I think the difficulty for our competitors again has to do with scale, that is we have a sales force that is such that we can just simply touch a lot more customers than any of our competitors can touch at a one point in time. We added to that the breath of our total product offering that we have and we can literally solve almost any problem that a customer may have on a particular Board that they're may be designing, which allows them to really solve their problem fairly quickly with solutions that we have as opposed to having multiple vendors in. Those are probably two elements of the position that we enjoy today and we'll enjoy in the future that we would expect to be quite difficult for our competitors to really be able to overcome, so we remained confident that our objectives to growing our positions in analog are really pretty solid and within our reach.

(Excerpt from full TXN conference call transcript)

All in all, it seems that management teams are seeing the competitive pressures that are reflected in the PPI, and are responding to them. Their response, I believe, will improve the industry's fundamental balance and result in better pricing and better stock prices.

Disclosure: author holds put options on the shares of Lam Research (NASDAQ:LRCX) and has a short position in put options related to the Semiconductor HOLDRs ETF (NYSEARCA:SMH).