Thank you for your inputs.
Agree that there are many factors, including gross profit margins, EBITA, and others which have to be taken into account regarding valuation.
The concern is that even though the semiconductor market has good growth potential, too much emphasis is on short term financial returns. One key factor is that R&D as a percentage of revenues is lower than the projected trends because of the emphasis on short term profits.
The analysis of IBS based on capacity and demand is that there will be significant overcapacity of wafers in a number of technologies in 2020, and this is partly due to the large investments in China. Overcapacity is a key factor in the downturn of the semiconductor market. IBS is projecting that there is a high probability of a downturn in the semiconductor market in 2020.
The high valuations are, consequently, of concern.
Peter.Ting, I didn't view this article as stock picking for value companies; it's a stretch to say that AMD and Micron come out as 'winners' -- if anything, it's an indicator of investor skepticism.
What's striking is how much valuations have outgrown revenues this year. While you could argue that an individual company might outperform based on its own performance (nVidia is a perfect example: strong financial performance and participating in 'hot' areas -- or even AMD, while still challenged, at least has more competitive products than they have in the past few years, which has been reflected in their stock price), the broader trend appears to show irrational exuberance.
While market-cap-to-sales is far from perfect, it's a good choice if you're going to use one number. If I were going to pick nits, I'd say I prefer enterprise-value-to-sales (as cash and debt shouldn't markedly impact the sum-of-the-parts value of the business in most cases).
You're correct that earnings and growth (both revenue and earnings) are important financial metrics if you're going to roll up your sleeves and evaluate semi companies. I'd submit that for IDMs and foundries, EV/EBITDA is even more important and gross margin is also a major factor as the general market perception is that it's relatively easy to decrease below-the-line expenses but it's far more difficult to raise gross margins. Likewise, end markets, competition, market share in key markets all matter, too.
Watch Bloomberg for an hour or so and it will become clear that AI, BTC, Cloud, IoT, autonomous vehicles, etc. are all being sold to investors as themes and implicitly opportunities. A couple of years ago it was drones and 3D printing. And all this in an era of quatitative easing, reptriatiated profits, fiscal and regualtory 'reform' and burgeoning national debt. Will some tweak to the proliferating architectures for ML chips or BTC mining change the world? Some, I suppose. The relative levels of earnings and growth are of course real but even on Wall Street they understand tha the financial markets are not the economy.
This analyst ignores earnings and revenue growth in his 'analysis'. By just focusing on MC and revenue ratio, AMD is a winner. Also, Micron is a winner because it's a commodity memory producer with lower margins. The other factor is revenue growth. Autos, TV's and even appliances are including more and more electronics/semi-content. By ignoring growth rate differences between the companies, the analyst ignores a key valuation metric.