Chip Analysts Tripping Over Themselves To Be First

Everyone seems to be trying to call the bottom in the chip sector these days.  We’ve already seen sector upgrades from Goldman and others in the past 2 weeks; today upgrades came from Stifel Nicolaus on the semiconductor group as a whole, as well as individual nods to Broadcom (BRCM), Intersil (ISIL), and NVIDIA (NVDA).  While we don’t take to calling troughs over here, we did take a look at NVIDIA’s valuation yesterday. 

Analysts are scratching their heads over some signs that trends are improving while the overall economy’s growth could be stalling.  Spot prices on flash memory have improved nicely in the past few weeks, inventory levels have been dropping since January and global markets appear strong. 

Yet a look at Intel shows nothing but downgrades since the beginning of the year.  Agere’s (AGR) recent sales warning shows a whole lot of weakness in the cell phone and network provider markets.  And as for the “commoditized” chip companies, has anyone been happy with Micron stock (MU) over the past few years, or even TSC and TXN for that matter? And look at Marvel Technology Group (MRVL) where the past 3 months have brought 3 upgrades (to “buy” or better) but also 6 downgrades.  Jim Cramer is also out reiterating his "Sell Tech" and specifically in almost everything chip related.

It may be time for all of us to startseeing that the semiconductor sector may not be as cyclical as thepast.  Yes, there will still be relative cycles, but the end productdistribution for chips is just so diverse now; there are almost minicycles ebbing and flowing constantly as opposed to industry-widesemiconductor growth.  When PC’s were growing at 25% plus rates foryears, it was a different story, just as it was when handset growthtook off 5 or 6 years ago.  But now semiconductors are finding theirway into everything and every business, which ties their success moreto GDP, less on any one product group. 

It’s almost like the collective analystcommunity just wants to appear savvy and remind us all that “we knowthat semiconductor stocks have been very cyclical”.  Congrats, guys.We know that you don’t want to miss out on the stock run-ups that willoccur when earnings show improvement or guidance is upped bymanagement.  And yes, that may be happening soon, but the consumerstill drives most of these markets and the consumer’s spending power isup for debate these days. 

Nobody is really getting behind thestocks that should lead, and the long-term beneficiaries from industryexpansion such as Applied Materials (AMAT) and KLA-Tencor (KLAC) havebeen dogs for several years now. 

First quarter earnings will be comingout in the next few weeks, and this will be the time to evaluate thestate of the industry.  Looking at 1^st quarter book/billratios, inventory levels, and pricing will tell us if any real momentumhas been gained.  Guidance will likely be tempered to reflect theuncertainty over the state of the economy for 2007.  We will beanalyzing 1^st quarter earnings of the market leaders as they come out while we leave the dowsing to the sell-side firms. 

Ryan Barnes
March 30, 2007

Ryan Barnes can be reached at [email protected]; he does not own securities in the companies he covers.