From EDN article
Christopher Danely, managing director, senior analyst and global coordinator for semiconductors at JP Morgan said earlier this month at the Churchill Club’s 12th
Annual Semiconductor Forecast that he believes the worst is over.
“Multiples have come down because stockholders realize growth in the
industry is slower,” he said.
Danely reminded that semiconductor industry revenue grew at a
9-year CAGR of 13% between 1990 and 1999, but growth has since slowed
to a 5-year CAGR of 10% between 2003 and 2008 (estimated).
Comparatively, the US GDP grew at a CAGR of 5.3% between 1990 and 1999,
and 4.9% between 2003 and 2008 (estimated).
Between 1995 and 2008 (estimated), semiconductor industry revenue
grew at a 13-year CAGR of 5%, while the US GDP grew at a CAGR of 5.1%.
On a unit basis, semiconductor industry units have grown at a 9-year
CAGR of 9% between 1990 and 1999 and have accelerated to a 5-year CAGR
of 11% between 2003 and 2008 due to increasing semiconductor apps in
consumer electronics. At the same time, ASPs rose at a 9-year CAGR of
3% between 1990 and 1999 but have declined at a 5-year CAGR of -1%
between 2008 and 2008 mainly due to pricing pressures from the consumer
As such, Danely expects lower, but still good, growth for the industry.
Interestingly, he also believes semiconductor companies should be
run more like “normal” companies [i.e. Philip Morris] and less like
growth companies [ala Google]. Specifically, changes are needed in
order to create shareholder value, namely more dividends, less
operating expenses, and increased focus on cash management.
Although he believes the worst is over, he acknowledged that it is
hard to get excited as demand is lackluster. Coupled with that, margins
are not attractive but valuation is seen to be OK for 2009. While
inventory is no longer excessive, it is definitely not too low either –
all of which boils down to another year of so-so returns, Danely
Speaking of demand, during the same Churchill Club event, Dan Niles,
CEO of Neuberger Berman Technology Management, a subsidiary of Lehman
Brothers, asserted that a true picture of end user demand for the year
is not clear, making it is difficult to rely on forecasts.
While the government stimulus checks are boosting consumption, once
they are spent, the picture will be clearer as to what consumer
spending may be. Because of this, Niles said there is reason to worry
about a recession occurring late this year or early next year.
Compounding matters of a murky demand picture is the skyrocketing
price-per-barrel of oil, higher food and consumer goods prices due to
rises in transportation costs and, of course, the housing crisis. “The
inventory of unsold homes is the underpinning of all the problems we’re
having,” Niles noted.
The global economic environment comes into play as well. As economic
growth stalls around the world, semiconductor growth will stall as
well, he said.
Niles also observed that emerging markets are not doing as well as
expected, and pointed to PC makers Acer and Lenovo, both of which
posted less than stellar Q1 financial results.
In addition, the handset market in China is slowing, according to
Longbow Research semiconductor analyst Tayyib Shah, based on a June
survey of mobile phone retailers in the US and China that shows the US
market rising and the Chinese market flattening.
“China’s flat month-over-month sales number is a sign of weakness in
that growing market which had seen near double-digit sequential. In the
US the average was driven up by a number of contacts at Best Buy who
reported a month-over-month sales increase of over 25%. If we strip out
the numbers reported by our Best Buy contacts, the remaining US
contacts reported a 3% month-over-month increase in sales,” Shah
offered, in a statement.
Shah said these trends support the 2% quarter-over-quarter decline
in National Semiconductor’s handset revenues that he is projecting for
the company’s fiscal Q1 2009 (ending August).
The handset trends in China are attributed to macroeconomic concerns
over a slowing economy, a high inflation rate, and the recent
earthquake. In addition, China shortened its May Labor Day holidays to
three days this year from seven days last year, which Shah believes
dampened handset sales.
As if that weren’t enough, last Friday, the Dow Jones Industrial Average dropped more than 200 points,
tamped down by another steep decline in financial shares and a big
rebound in crude-oil prices, according to the Wall Street Journal.
Trading ended below the 12000 mark for the first time since March 17.
In the end, there is no way to know how 2008 will wrap up for the
semiconductor industry until a clear picture of consumer demand can be
had – since that segment drives so much of the industry’s activities.
One thing is for sure, the industry is in for a bumpy ride until then,
with conditions likely to get worse before eventually improving.
While all the bad news can get oppressive, thankfully during the
Churchill Club event, Sangeeth Peruri, managing director of J. & W.
Seligman & Co. reminded that the great thing about the
semiconductor industry is Moore’s Law, which drives constant innovation
and new opportunities for growth.