Applied Materials (AMAT) reported earnings last night and gave a very dour sounding warning for 2005. Management expects orders to drop considerably, by 35% in the 1st Q 2005.
This news may have significant relevance for the economy. Semiconductor production has historically been a leading indicator for the economy, similar to copper. Equipment to make semiconductors, what AMAT sells, is thought by some to be a real early leading indicator.
Assuming AMAT knows its business, this would be corroboration of what the bond market is telling with a flattening yield curve, the economic cycle is maturing. This could all change but this is the current message of the market. If investment demand continues to flow away from semiconductors, you might see software, internet and other non-semiconductor tech outperform. I have not owned any semiconductor stocks for tech exposure in quite a while. Despite the obvious appeal of something like Sandisk which stands to benefit from a remarkably easy to understand demand catalyst I would think there is a high likelihood it could get thrown out with the bath water. But I could be wrong.
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2 comments:
Roger
I was quite surprised to see the marktet's reaction to AMAT's 1Q forecast yesterday. I thought they would be down 15%+.
Regarding your comment.."Despite the obvious appeal of something like Sandisk which stands to benefit from a remarkably easy to understand demand catalyst..."
Be careful with SNDK, the demand catalyst is easy to understand, but the coming tidal wave of supply to the NAND flash industry is going to overwhelm the demand, IMO. The NAND flash industry is evolving like the DRAM industry, which is characterized by irrational pricing and brutal competition. Also, DRAM players like Hynix, STMicro, Micron, and Infineon have entered the flash market to compete with Samsung and the Toshiba/SNDK partnership. One final point, look at the deterioration of SNDK's B/S from an inventory standpoint and then consider that $1.25B of their cash and equiv amount is commited to fund Fab3 (300mm/70nm)with Toshiba in 05/06. This appears to be one of those businesses that sucks any FCF right back into it in the form of capex.
Best,
Parkite
In Response to the comment left by Parkite:
Thank you for reading the blog and leaving a comment. I think your comment is spot on. I stick by my comment about demand, but you are right I would not want to own SNDK or any of the others. If Semi's do well, which they could, I think I would get just as much return in other tech without the same kind of risk that semi's have right now. Again that is IF the group were to do well. Not bet I am willing to make right now. Thanks again!
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