Merrill Lynch sucked the oxygen out of the room last week with the most bearish outlook issued to date for semiconductors and semiconductor equipment. The thing that shall not be whispered-that the party's over before most of us donned the lampshades-was said aloud. But something needed saying, given that the stock performance of most semiconductor and related companies has fallen in recent weeks in a very counterintuitive manner. If business is booming, why the market's long face?
The analysts at Merrill see end demand as tepid at best, and view growing inventories-while far from bloated-as a cause for concern if consumers head for the hills again. The analysts sharply revised their forecast for 2005 revenue growth from 16 percent year over year to 6 percent. Much of that comes in anticipation of weak ASPs, but some is from lower unit forecasts.
OK. So everybody's still gun-shy-from OEMs keeping a tight supply chain to an analyst community smarting from missing 2001 and looking over their shoulders at tougher government regulators. More troubling was the Merrill analysts' belief that the end of cycles may be here. Not in the 1999 sense ("Oh, the cycles are over; it's all up and to the right from here!"), but in a new way: Predicting stock swings based on industry performance may well be out the window. "The market's attempts to anticipate changes in industry direction have caused the relationship to break down," Merrill analysts wrote.
This kind of uncertainty is unsettling in an industry that sets its watch by Moore's Law and everything that trickles down from it. Predictability in the discipline of electronics design and the business that surrounds it is a good thing.
Nevertheless, a few things lead me not to worry too much about Merrill's thesis. First, there is no sign that semiconductor content is shrinking. Indeed it's expanding pretty fast. The ASPs may be low and the margins tight, but semiconductors are a growth business. Next, there is a surfeit of venture capital money out there again. If the future of semiconductors is dim and unpredictable, why are people again funneling millions into risky VC funds? And lastly, if Micron CEO Steve Appleton can walk away from a stunt-plane crash with a forehead cut, his survival speaks metaphoric volumes for our industry.