Foundry shakeout looms, analysts say

By William Trent, CFA of Stock Market Beat

According to Electronic Engineering Times, a Foundry shakeout looms, analysts say:

Silicon foundry vendors were once star performers in a booming sector shielded from the topsy-turvy cycles of the larger semiconductor industry. But those days are gone. Buffeted by a slowdown in IC sales, the foundries now face lower-than-expected growth heading into 2007 and perhaps beyond—a trend that could accelerate a long-awaited shakeout, analysts and vendors warned at October’s FSA Suppliers Expo in California.And just as the business slows, new competition has arisen as several big integrated device manufacturers (IDMs)—Fujitsu Ltd, Infineon Technologies AG and Samsung Electronics Co. Ltd—have separately expanded their own foundry efforts. Over the years, the IDMs have come and gone in this arena. They tend to expand their foundry offerings when business is soft and they are desperate to fill their empty fabs, then pull back when business improves. However, one vendor—chip giant Samsung—appears to be a more serious player and could change the landscape for the pure-play foundries.

On top of these stresses come signs of a shakeout. For years, analysts have predicted a major consolidation in the foundry business, where too many vendors compete in a cluttered arena. And it’s a little-known fact, but only a handful of foundries are actually making money, analysts said. Most vendors have never made a dime and continue to spill red ink, leaving some to wonder about the future of the weaker players. Soaring fab costs, mounting losses, and the difficulty of finding and holding on to customers are among the challenges for weaker vendors.

All of this relates to the financial discipline we have been saying the semiconductor makers must adopt. While some believe the shakeout will involve large acquisitions or companies going private, it is probably better for the industry if some makers simply disappear. In the end, it will likely be a combination of both that rights the ship.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Intuit (INTU) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Lion’s Gate (LGF); Three Five Systems (TFS); Adobe Systems (ADBE) call options; IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Ceradyne (CRDN) put options; Lion’s Gate (LGF) call options; Dell (DELL) put options; Plantronics (PLT) put options;

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