Semiconductor Industry Should Quit Patting Itself on the Back (and Building Capacity)

By Wlliam Trent of Stock Market Beat

Semiconductor Industry Association provided the monthly global sales report for December.

The Semiconductor Industry Association (SIA) today reported that global sales of semiconductors reached a record $247.7 billion in 2006, an increase of 8.9 percent from the $227.5 billion reported in 2005. Worldwide sales in December were $21.7 billion, an increase of 9 percent from December 2005 when sales were $20 billion. December 2006 sales declined by 3.6 percent from the immediate-prior month, when sales were $22.5 billion. Worldwide sales in the fourth quarter were $65.2 billion, an increase of 9 percent over fourth-quarter 2005 sales of $59.9 billion and an increase of 1.9 percent over third-quarter 2006 sales of $64.0 billion….

[SIA President George] Scalise noted that 2006 global sales came within 0.4 percent of the SIA forecast of $248.8 billion. “With generally healthy economic conditions in all of the world’s major semiconductor markets, we believe our forecast of 10 percent growth to $273.8 billion in worldwide sales in 2007 is aligned,” Scalise concluded.

Lest you get the impression that the dudes at SIA are really on-the-ball forecasters, keep in mind that the 0.4 percent error was off of their most recent estimate. When the SIA issued their initial forecast for 2006 they said:

The forecast calls for 2005 sales to increase by 6.8 percent to $227.6 billion, followed by increases of 7.9 percent to $245.5 billion in 2006, 10.5 percent to $271.3 billion in 2007, and 13.9 percent to $309.2 billion in 2008.

Or perhaps we’re being more fair than we should. Given that they are forecasting several years ahead, their true initial forecast for 2006 occurred late in 2003, when they said:

Total Semiconductors: The total semiconductor market is expected to increase 15.8 percent to $163.0 billion in 2003. The SIA forecasts growth of 19.4 percent to $194.6 billion in 2004, 5.8 percent to $206.0 billion in 2005, and 6.6 percent to $219.6 billion in 2006.

Granted, the forecasts are about as good as anyone’s could be, and we wouldn’t disparage them in this way had Scalise not drawn attention to the excellence of their November forecast.

Now on to the real juice:

The industry is still building too much capacity, and it got worse in December.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Starbucks (SBUX) call options; Landstar (LSTR) put options; Plantronics (PLT) put options

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