The global economy is facing truly challenging situations. Amid rising energy and commodity costs, inflation is starting to become a serious problem for many industrial nations in Europe and Asia. People are feeling this pressure with rise in living expenses and started to cut down on personal spending. Outlook is grim and I suspect further slowdown in Asia, especially when the governement spending incentives in China will drastically slow down after this summer Olympics.
The semiconductor industry is closely tied with global economy. Many expect the second half recovery story in the US economy. However, I contend that this is too optimistic and there are significant downside risk in the US as well as Asian countries' economy.
I foresee significant inventory correction problem this fall when excess chip supply will cause precipitous drop in the demand for the output of the chip supply. Consumers are less likely to spend on digital TV's, buying new computers, new 3G cell phones and blackberrys, and game consoles. There will be futher deterioration in the memory market. Samsung and Hynix in Korea are already preparing for this scenario and is aggressively cutting back on the capital purchasing plans. Also struggling flash memory players in the US as well as in Japan does appear to adjust their purchasing plans downward.
IT is true that semi-equiment companies' share price have dropped significantly from their high's, refecting more challenging business conditions. But firms like Smithbarney most recently put companies like AMAT and KLAC on the top buy list, citing demand pick up in the second half and solar business potential for AMAT. But on Friday, the firm downgraded AMAT to hold rating. In my humble opinion, we are seeing the most challenging business condition for semi-equipment market, probably worse than the downturn in that we have seen in late 90's and early 2000's. I will elaborate more on this in my future writings.
As much as shares of AMAT and others are down 30% from their high's, I continue to recommend selling them into strength. We need to see a few companies downsizing further and even filing bankrupcy in Asia for me to call the bottom.
Specifically, AMAT is trading at higher multiple due to its exposure to solar market. But AMAT's focus in solar ramp of the business left the company less focused in becoming more competitive in key semi processing markets such as Etch and CVD. Also payoff for solar investment seems to be dubious amid volatile market conditions in solar sector among different solar technologies (Thin film PV, Crystialline Si, CdTe thin film, CIGS thin film, Virtual single Crystalline Si). Which is the prevailing technology? and is AMAt betting it correctly by pushing thin fil PV that has the highest cost of manufacturing and lower cell efficiency? That will be a topic for separate discussion.
Anyway, stay away from semi-euipement and most of semi names. I see further price correction of potentially additional 15 to 20% in these names as Dow makes push downward towards 10,000 level.
Good luck guys..