When the Chips are Down
Quick math lesson: If the average selling price declines by 55% and unit shipments increase by 11%, what happens to revenues? Before you go getting a headache figuring this out – it’s bad.
We haven’t been shy about our bearishness toward semiconductor stocks. So every once in a while it is important to sit down and review the facts, and decide whether the bearishness is still warranted. With the Philadelphia Semiconductor Index (SOXX – see chart) down more than 25 percent from its highs earlier this year, now is as good a time as any. We don’t come away from our study feeling any better.
To begin with, the Industrial Production/Capacity Utilization information released Monday by the Federal Reserve shows modest improvement. But bookings for semiconductor equipment rose 68% year/year in June, suggesting it is unlikely capacity will tighten any further.
PPI data shows that price declines are running at about the average pace, but may have turned down recently. 
The rumors of a slowdown in mobile phone chips, which have been the key growth vehicle this year, gained credence on Qualcomm’s (QCOM) conference call:
Based on our recent checks, we believe higher than normal channel inventory build has occurred for China and India consistent with our prior expectation. For the rest of the world, we believe channel inventory levels are comfortably within the normal 15 to 20-week band.
Their disappointing guidance for chip shipments reflects an expected inventory drawdown.
Although Motorola did well in the handset space, their conference call comments suggest it resulted from share gains more than industry growth:
In Mobile Devices, more records and outstanding results. We shipped more than 51.9 million units in Q2, an increase of 53% over the second quarter last year, and up over 12% versus quarter one. Once again, none of our competitors are close to this kind of performance.
Market share is up now to 22% — up almost 4.3 percentage points year over year and up 1.3 points quarter over quarter. We earned an 11.2% operating margin. We continue to achieve our goals of year-to-year operating margin improvement and quarter-over-quarter market share growth.
Following up on our own story about Intel’s new processor, Tech Trader Daily notes a rising tide of support for Intel:
Despite last week’s contention by Needham & Co.’s chip analyst Charles Galvin that Intel (INTC) is still not a “value play,” the tide of opinion seems certainly to be turning in its favor and against rival Advanced Micro Devices (AMD), now that the number two microprocessor vendor faces the prospect of revitalized competition from Intel.
However, their recent guidance may take care of that for them. At least they promise not to make so damn many chips next year – or any way not so damn many as they might otherwise have. In their conference call they said:
Turning to operations, we have finalized our plans to take $1 billion out of Intel projected spending in 2006.
In an ironic twist, the one growth area for equipment makers may be running into issues obtaining silicon. Tight supply of silicon materials continues to weigh on solar cell makers, with equipment suppliers now observing that some industry players have requested a postponement of equipment delivery, according to sources at a distributor for solar energy equipment.
Disclosure: William Trent has a long position in SMH.
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