SAN FRANCISCO--There is always one bear in the crowd, as chip-equipment analyst Bill Ong has downgraded the semiconductor-equipment sector from a buy to a hold rating.
"While end markets are seeing some noticeable strength, not all areas are recovering at a rate to spur additional capital spending," said Ong, who watches the sector for American Technology Research Inc. in San Francisco, in a report issued on Thursday (April 29).
"Furthermore, the rapid surge in orders coupled with fewer but larger chip spenders could create quarterly periods of order declines thereby resulting in a lack of future earnings visibility. Given the current order growth rates, the industry could be nearing peak levels within the next 12 months where orders could then stall," Ong said.
"As a result, we are downgrading the our semi equipment stock group from buy to hold rating, which includes front-end equipment Applied Materials, KLA-Tencor, Lam Research, and Novellus; back-end equipment Amkor and Teradyne. We retain our hold rating on Credence as well as our hold rating on the photomask makers, DuPont Photomask and Photronics," he said.
Not all chip-equipment stocks are in limbo. "We are retaining our buy rating on Asyst, Kulicke & Soffa and Mattson on valuation and Ibis as a technology play," he said.
Ong sees some warning signs, including a number of notable concerns in the macro-economic and geopolitical front. In addition, the OEM market has seen some notable improvement from Motorola and EMC, but Nokia and Seagate provided some disappointing results in recent times, he said.
Broadcom, TI, and others reported better than expected results in a seasonally weak quarter. "However, we are seeing the worldwide semiconductor unit growth rates, 3-month moving average year/year growth rates beginning to slow as we move into the June and September quarters due to more difficult comparisons and summer seasonality," Ong said.
"The average selling prices have steadily improved since spring 2003 but could also likely decline in the June and September quarters due to more difficult comparisons on a 3-month moving average year/year growth rate," he said.
"While we expect semi unit growth rates to continue to grow in 2005, the growth rate is uncertain for 2006 and thus the level of supply-side equipment orders could pause until there is better demand visibility," he said.
The most troubling signs are in the chip-equipment sector. "There are disconcerting signs of order declines starting in this June 2004 quarter, albeit off of difficult sequential quarterly comparisons. Kulicke & Soffa and Teradyne conveyed that after 6 months of substantial order growth, June quarter bookings are likely to decline but maintain these general levels given steady chip unit demand," Ong said.
"The more disturbing order outlook came from KLA-Tencor where after posting 18 percent sequentially higher March quarter orders, June quarter orders could either be up 10 percent or down 15 percent depending on the timing of two sizable orders in the $50-100M range from a major Asian memory and a foundry chip customer," he said.
"From a supply side perspective, given the early-middle part of the growth cycle, it seems peculiar that given the much talked about strong demand, that timing is so uncertain for metrology tools. Unlike factory automation that is dependent on production line construction time or 12-months long lithography stepper lead times, metrology tools are rapidly employed into a production line."
The bigger, long-term picture also looks troublesome, as chip-equipment makers are now selling to fewer and fewer customers. "During the first half of the 1990s, there were many memory chipmakers in Japan, Taiwan and the growing presence of Korea fueling capital equipment investments. ASIC chip investments from the Japanese chip makers also added to the growth of the semi equipment industry," he said.
"As the industry matures and markets consolidate, the major DRAM makers are likely to be limited to the top 3, and ASIC investment has moved to the foundries and microprocessor investment is limited primarily to Intel. Thus the top 5 chip spenders, representing about 45 percent of global capital spending, are Intel-microprocessors, Samsung-memory, TSMC & UMC-foundries and Texas Instruments for DSPs," he said.
The great debate
Needless to say, there is considerable debate about the outlook for chip equipment. On one hand, Ong is somewhat bearish about the sector. Meanwhile, VLSI Research Inc. is bullish about the growth, but believes the market is slowing, overheated and "maxed out" (see April 22 story).
On the other end of the spectrum, Gartner Inc. is extremely bullish, as the research firm raised its forecast for capital spending and equipment (see April 27 story).
Worldwide semiconductor capital spending is expected to jump 41.7 percent this year, from $29.059 billion in 2003, to $41.179 billion, according to a report issued by Gartner, a market research firm based in Stamford. Total equipment expenditures are projected to increase 47.7 percent this year, from $22.823 billion in 2003, to $33.719 billion in 2004, according to the report.
In 2005, capital spending and equipment expenditures are projected to jump 30.7 and 27.9 percent, respectively, according to Gartner.
Walter Class, strategic marketing manager for chip-equipment maker Axcelis Technologies Inc., remains bullish despite Wall Street's pessimistic stance. Class also believes Gartner's forecasts are too low. "If anything, (Gartner) is timid about 2005," Class said. "In 2005, it's going to be a strong year for chips."
There are several positive signs in the market. Fab capacity remains tight and end-user demand remains strong, which bodes well for chip equipment makers. "We're going into 2005 with a backlog," he told Silicon Strategies.
Some sectors are performing better than others, pointed out David Rubinstein, an analyst with Tokyo-based Japaninvest KK . "The recovery for backend has been much faster," he said.
Front-end equipment suppliers like Tokyo Electron Ltd. (TEL) has seen a "V shaped" recovery (see April 28 story). "I would say it's not a quick recovery (for TEL)," he said. "TEL's recovery is right in line with other SPE companies, like Applied, Nikon and Dainippon Screen," he said.