By Benjamin Pimentel
After powering last year's technology rally, chip makers are now
playing spoiler for the group, as analysts offer increasingly mixed
views of where the semiconductor industry is headed--and some even
warn of expectations that are overheating
This much was evident Tuesday as chip shares fell, pushing the
Philadelphia Semiconductor Index down 4% to 352. Semiconductor
stocks were the main factor leading the Nasdaq Composite Index down
1.4% to 2279 recently.
Nearly two weeks into 2010, the Philadelphia Index is down more
than 1%, while the Nasdaq is still up more than 1%, a role reversal
that underscores growing concern on Wall Street about the strength
of the chip momentum.
In fact, some major chip companies have seen their shares fall
sharply since the start of the year.
Advanced Micro Devices (AMD) is now down about 10%, while Texas
Instruments (TXN) has sunk more than 3% and Nvidia Corp. (NVDA) has
fallen more than 5%. Meanwhile, sector giant Intel Corp. (INTC) is
clinging to a fractional gain for the year to date.
Wall Street's growing ambivalence was underscored in a Deutsche
Bank note on Monday.
"Heading into 2010, we recommend investors remain overweight
[on] the semiconductor sector, but with increasing selectivity
following the sector's significant appreciation in 2009," Deutsche
Bank analyst Ross Seymore said.
"We expect the semi sector to outperform again in 2010 based on
a combination of lean supply, strengthening demand and valuation
expansion," Seymore said. "However, we also expect stock picking to
become increasingly important following 2009's strong share price
and estimate increases."
Inventory Glut?
Shares of chip makers took a heavy beating in 2008 as the
industry reeled from one of the most severe downturns in its
history as the global recession took its toll.
But many of the companies staged a comeback as sales rebounded
due mainly to what analysts say was an inventory correction
following the economic downturn, during which manufacturers scaled
back chip supplies to levels below real demand.
As tech demand picked up, so did the expectation the chip sector
was steadily getting back on track to steady growth, although some
analysts have warned of supply outstripping demand.
This worry was highlighted in a report Tuesday by J.P. Morgan
analyst Christopher Danely, who predicted an "inventory glut" in
the sector.
"Our recent checks indicate inventory is higher than it was a
year ago, and we also expect most semiconductor companies to build
inventory during [the first half of this year] due to expectations
of robust demand during 2010," Danely wrote. "We think this is
likely to set up a potential inventory glut heading into [the
second half of the year] due to aggressive buildout in excess of
end demand."
But other analysts disagree on this point.
Broadpoint AmTech analyst Doug Freedman said in a note that when
it comes to the personal computer market at least, the 2010
"replenish remains underestimated."
"Many locations still report shortages--memory, battery
chargers, GPU's [graphic processor units]," he added in an e-mail
interview. "The inventory levels are not acceptable for
[manufacturers] to build to demand. I also think demand continues
to be stronger than expected."
Many analysts say two trends bode well for the chip sector.
Consumer demand has picked up, and businesses are poised to
begin spending again to upgrade and even replace aging computer
systems. On Tuesday, Forrester Research predicted global
information technology spending by businesses and governments to
rise by 8.1% to $1.6 trillion, after falling 8.9% last year.
But when it comes to the chip sector, some analysts warn of
overheated expectations, especially given the economy's still-shaky
outlook.
"We maintain our cautious view and believe semis could pause as
we approach and work through earnings season," Wedbush analyst
Patrick Wang said in a note Tuesday.
He noted that "shares have traded up in anticipation of strong
[fourth-quarter] results," adding, "As such, we are weary of a
"sell on the news" type of reaction and expect pressure in the next
few weeks with a short and shallow correction."
-Benjamin Pimentel; 415-439-6400; AskNewswires@dowjones.com