Tuesday, 20 December 2005

Chip stocks fall as prospects improve

Weakness in the semiconductor industry drove US stocks down yesterday. Reuters reports:

U.S. stocks fell on Monday on weakness in semiconductor shares after a brokerage cut ratings on six major stocks in the sector, including Texas Instruments Inc. driving the Nasdaq Composite index to its biggest one-day percentage loss in nearly eight weeks...

The Dow Jones industrial average was down 39.06 points, or 0.36 percent, at 10,836.53. The Standard & Poor's 500 Index was down 7.40 points, or 0.58 percent, at 1,259.92. The technology-laced Nasdaq Composite Index was down 29.74 points, or 1.32 percent, at 2,222.74...

Brokerage Stifel, Nicolaus & Co. cut its rating on six semiconductor stocks, saying the market has already taken into account most of the industry's strengths and it was "time to take profits" on the sector...

Declining stocks outnumbered advancers by a ratio of about 8 to 3 on the NYSE, while on Nasdaq, the number of stocks that fell beat advancers by about 7 to 3.

A case of selling on good news, it seems. And the news in the semiconductor industry has been good recently.

About two weeks ago, Semiconductor Equipment and Materials International (SEMI) had reported that chip-equipment makers had forecasted that sales would rise 9.1 percent in 2006 followed by another two years of double-digit growth after falling 11.2 percent in 2005, according to an Electronic News report.

Yesterday, the Semiconductor Equipment Association of Japan (SEAJ) reported that Japanese chip-equipment makers saw orders continue to grow in November, according to another Electronic News report. November's bookings were up 6.5 percent from October and 15.2 percent from the previous year, while the book-to-bill ratio rose to 1.05 in November from 1.01 in October and 0.9 in September.

And Reuters reports that Samsung Electronics Co Ltd, the world's top memory chip maker, said yesterday that it would spend 786.8 billion won (US$774.4 million) to upgrade and expand lines for dynamic random access memory and flash chips to capitalise on an expected recovery in chip prices.

But this story highlights the fact that while growth may be good, there are concerns over profitability, at least in Europe.

Although the worldwide semiconductor industry is anticipating growth over the next two years, the capacity utilization of fabs, the silicon supply outlook, and uncertainties in the backend could give chip companies some unpleasant surprises during that time, according to SEMI Europe.

And of these, the back-end could be the most shocking. Many test and assembly contractors are being so starved of adequate returns on their existing investments that they cannot afford to upgrade for the future, according to Otto Kosgalwies, STMicroelectronics General Manager Supply Chain, who was a guest speaker at a SEMI event held here. As the semiconductor industry now contracts out a major portion of the test and the assembly of its chips, the supply chain could simply fail in a catastrophic domino effect.

1 comment:

Anonymous said...

This has been expected for some time now. The normal cycle is being stretched. No longer is your 33mhz machine in need of an upgrade to a 66mhz. My old 700mhz is just fine for now, and for the near future.

Traders over at HSM which focus more on penny stocks have been making comments on this issue in recent threads. But another thing to watch is that chips are making their way into things other than computers. Soon your fridge will be blue toothing with everything else in your kitchen, keeping inventory and telling you when your milk is expiring... So there is still a big future for chips.

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