Semiconductor Oversupply: You Ain’t Seen Nuttin Yet!

By William Trent, CFA of Stock Market Beat

At Stock Market Beat we have been talking about a looming semiconductor glut for the better part of a year. Although there are now admissions that the glut is here, this post at Semiconductor Fabtech suggests it has much farther to go than many industry observers are willing to admit.

Although Intel Corp. plans to start volume production at the 45nm node later this year, the leading-edge node for the rest of the CMOS logic community will be 65nm. This simple statement lays the foundation for a host of misconceptions about the 65nm node having been ‘cracked,’ and that volume production at high yields is a given.It may come as shock to some that the vast majority of chip manufacturers currently ramping 65nm processes – including some of the major foundries – have less than 50 percent yields!

We are already seeing widespread reports of oversupply in semiconductor land, though the stocks have held up well due to reasonably benign forward guidance. But we are only beginning to see all of the excess capacity that was ordered last year getting installed, and with what has been installed running at 50% yields, imagine the glut that will form – during the seasonally slow period for semiconductors – as that capacity ramps up to full speed.

The good news for investors is that the stock market tends to look ahead, and although the stocks may be punished over the near term it is likely to provide a buying opportunity provided the capacity orders can be reined in.

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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