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More dips for the chips?
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September 20, 2000: 4:05 p.m. ET
Battling a six-month stock slump, semiconductors try to recover
By Dan Briody
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SAN FRANCISCO (www.redherring.com) - The semiconductor market is currently mired in a six-month slump, and as concerns about the near-term future of the industry mount, chip companies have had little luck convincing investors that all is well. Tuesday at the Banc of America Securities investment conference in San Francisco was no exception.
Since March, when investors first started to take the air out of semiconductor stocks over fears of overvaluation and interest-rate hikes, the sector has traded sideways at best. But during that time, things have gone from bad to worse.
Consumers haven't been upgrading their cell phones like companies had anticipated, PC demand has been sluggish, and analysts have been saying the end of the infamous semiconductor cycle is in sight. Can you blame investors for wanting out?
There have been pockets of resilience, and most semiconductor companies are now pinning their hopes for growth on the wireless market. However, at the BofA conference, Texas Instruments, Analog Devices, National Semiconductor, and Broadcom all pounded the pulpit, pleading their cases to a skeptical investment community.
Chipping away at each other
Tuesday began with a curious press release from Texas Instruments (TI), detailing what chief executive officer Tom Engibous would be presenting at his briefing to the conference later in the morning.
In the release and then later in Mr. Engibous's presentation, the company made public that it was restating its forecast for how many cell phones would ship with its chip sets, from 435 million to between 400 million and 435 million. Also, engineers were being re-designated away from the company's ailing disk drive business and into the higher growth communications business, especially wireless.
"The hard disk drive business has stunted our growth," said Mr. Engibous.
Inexplicably, TI's stock was up on the day, gaining nearly 8 percent to finish at $63.88. Analysts attributed the uptick to the severe beating the stock had taken over the previous three months, during which time it lost 32 percent of its value. Despite the anomalous increase, TI's news did little to buoy lingering investor concerns.
In sharp contrast, TI rival Analog Devices (ADI) beat its chest for the 30 minutes it had the podium. One of the few semiconductor companies to emerge from the sell-off unscathed (the stock is now just 13.6 percent off its 52-week high), CEO Jerry Fishman needed only let ADI's stellar numbers speak for themselves.
Last quarter, ADI's year-over-year revenue growth was an eye-popping 85 percent, as the company concentrates exclusively on digital signal processors (DSPs) and high-performance analog chips. So the focus of the growth is on wireless handsets, sales of which are expected to take off when new Internet functionality is available. In 2001, the company expects revenue to increase 45 percent, and as a result of this optimism the stock price has nearly quadrupled in the last 52 weeks. Shares surged 7.2 percent on Tuesday to close at $89.
Pushing product
Less eventful were the presentations of National Semiconductor and Broadcom, as both companies tended to focus more on their product mixes than market conditions.
National Semiconductor, which is showing signs of life again after enduring a summer swoon during which its stock price was halved (from $72 to $33 in a month and a half), made some bold statements. Looking to boost investor confidence and continuing the theme adopted by all the semiconductor companies, chief financial officer Don MacLeod said National plans to increase its revenue per cell phone from $2.50 a phone to $25 a phone by expanding its product base and integrating functionality. The stock rose with all the other chip stocks Tuesday, gaining 6.8 percent to finish at $44.50.
Broadcom is also banking on convergence and integration and is planning a series of system-on-a-chip solutions aimed at home networking. Broadcom CEO Dr. Henry Nicholas spoke at length about highly detailed technical specifications, appealing to the attendees' inner geek.
In the end, however, the bottom line was that Broadcom would try to capitalize on the integration of voice, video, and data in the home in particular.
But with its stock on a year-long tear that has seen its price increase by a factor of five, Dr. Nicholas is going to have to do a little bit more to convince investors the price is justified at $235.37 and a multiple of about 183 times 2001 earnings estimates. He declined to comment on his ongoing legal battles with arch rival Intel.
Regardless of whether or not the semiconductor cycle has peaked or if it's got some legs left in it, these companies are battling it out day by day. Right now, though, the deck looks stacked against the industry as a whole, even though pockets of success can be found. For safety's sake, avoiding the whole industry in the short term wouldn't be such a bad idea.
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