Fundamental Improvement: Excess Semi Capacity Being Soaked Up

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Includes: PSI, SMH, SOXX
by: William Trent, CFA

The Semiconductor Industry Association released the January semiconductor sales report Monday:

Worldwide sales of semiconductors in January were $21.5 billion, a nominal increase of 0.03 percent from January 2007, the Semiconductor Industry Association [SIA] reported today. Sales declined by 3.6 percent from December 2007 when the industry reported sales of $22.3 billion. SIA said the sequential decline in sales was in line with traditional seasonal patterns for the industry.

“Virtually all product lines and all geographic markets experienced slightly lower sales in January,” said SIA President George Scalise.

The good news, as I see it, is that orders for semiconductor manufacturing equipment were down 22.3% in January. Less equipment means less capacity, and even the same amount of sales generation will soak up the excess and improve the pricing environment.

The semiconductor sales growth has exceeded semi equipment order growth since March 2007, so it is now likely to start showing up in the fundamentals. Yes, a general economic slowdown will make it harder for semi pricing to improve. But as long as the supply continues to grow at a slower rate, the semi cycle will return regardless of what happens in the business cycle.

Disclosure: William Trent is long SMH and MXIM, and has written put options against shares of LRCX.