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Stocks Sustainable? |
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Ed Wijaranakula, Ph.D.
Director of Market Analysis, Infotix
Systems, Inc. - January 19, 1999
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Since the stock market crash in early October 1998, high-flying
semiconductor stocks such as Micron Technology (NYSE:MU), Applied Materials
(NASDAQ:AMAT) and Taiwan
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Semiconductor Manufacturing Company (NYSE ADR:TSM) have surged to new all-time highs. The stock price of Micron, for example, has
appreciated by a
whopping 180% during the past four months despite the fact that Micron lost $234 million
last year and $46 million in the first quarter of the current year. Revenue of Applied
Materials has been stagnant for the past three years in a row while earnings per share (EPS)
has declined from $1.63 in fiscal year 1996 to $0.63 last year. The recent surge in the
stock price has been fueled by optimistic views from analysts such as
Tia-min Pang
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of
SG Cowen and Charlie Glavin Sr. of CS First Boston. As reported by Reuters,
Tia-min Pang
believed that "the worst of the recent semiconductor business cycle is now behind
us".
From our viewpoint,
most of the optimism in the semiconductor business up-turn has been derived from a
surge in dynamic random access memory (DRAM) chip prices and a comment originating from
SoundView Financial Group implying that one of the largest Asian chip manufacturers will
no longer accept additional orders from OEM customers. This bullish comment has been
widely interpreted as a possible shortage in DRAM chips. Although the price of megabit
DRAM chips in the fourth quarter of 1998 has increased drastically, the rise in
the DRAM
chip price could be related to cut backs in production by Asian chip manufacturers and
seasonally high demand for DRAM chips as computer manufacturers increase their production
for Christmas sales.
In addition, the DRAM shortage could be driven by the
recent acquisition of Texas Instruments' DRAM business (NYSE:TXN)
by Micron and Motorola's (NYSE:MOT) decision to drop out
of the DRAM market. From the fact that DRAM fabs all
over the United States including Samsung (Austin, TX),
Hyundai (Eugene, Oregon), NEC (Roseville, CA) and
Fujitsu (Gresham, Oregon) are either sitting idle or
operating far below their normal capacity, the observed
DRAM shortage could be only short-lived.
We observe
that the overcapacity issue is not confined to the DRAM
chip business but rather wide-spread into other
semiconductor business sectors including polysilicon, a
raw material used for fabrication of silicon wafers,
silicon wafers and foundry businesses. In a recent
interview with Electronic News, Michael W.
Kerschen, president of Advanced Silicon Materials, noted
that the market for poly(silicon) is continuing to be
slow in 1999.
We found that an overcapacity in chip manufacturing has
forced a foundry fab such as WaferTech, a subsidiary of Taiwan Semiconductor Manufacturing
Co., in Camas, Washington, to drastically alter their business plan and indefinitely
postpone the construction of a second fab.
The delay in the construction of the new fab
could affect semiconductor equipment companies such as Applied Materials.
Ironically, however, Taiwan Semiconductor
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Manufacturing Co., the parent company of
WaferTech, is still moving ahead with the construction plans of new 200 mm and 300 mm fabs
in the southern part of Taiwan. Both fabs combined are estimated to be able to
produce 20
million chips per month. From our observation, Taiwan Semiconductor Manufacturing
Co. is utilizing the Wal-Mart business model which is "high volume with a deep
discount price". We believe that such a model might not work well in the
semiconductor business since operating costs are significantly higher than a deep discount
retailer.
We suggest that the semiconductor business will still
remain weak until the oversupply issue is resolved and the supply and demand equilibrium
is re-established. DRAM pricing power could begin to erode as the Asian chip manufacturers
resume their operations. We suggest that the rise in the stock prices of those
semiconductor companies is not justified by overall market fundamentals and high
valuation, and in the long term, might not be sustainable. The recent insider trading by
Morris Chang, chairman of Taiwan Semiconductor Manufacturing Co., who sold a quarter of
his shares in the company on January 15, 1999, may substantiate our above arguments.
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About the Author: Dr. Ed Wijaranakula is presently the Director of Market
Analysis at Infotix Systems, Inc. Prior to Infotix Systems, he has worked with
Intel, Hewlett-Packard, Micron, Motorola and Texas Instruments and has held senior as well
as managerial positions in semiconductor manufacturing companies. He has published over 80
technical papers and holds more than 12 U.S. and foreign patents. His portfolio holds
no positions
or controls in any stock quoted in this article.
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