It's a good time to be holding chip and chip-equipment stocks. With worldwide demand surging and chipmakers ramping up production, leaders in these segments figure to go much higher through the second half of the year.
While most of the bellwethers in these sectors were dependent on PC sales for much of their growth, the Internet has created entirely new and extremely lucrative niche markets for chipmakers to harvest.
This week, CS First Boston analyst John Pitzer said business conditions and visibility at Applied Materials (Nasdaq: AMAT), the world's largest chipmaker, are high and he expects sequential growth in bookings, as well as sales and earnings in the next several quarters.
Applied Materials, which was trading around $95 a share, stormed up to a 52-week high of 115 in April after falling to a low of 30 1/8 last June. In between, it split 2-for-1 in March.
KLA-Tencor (Nasdaq: KLAC), Novellus Systems (Nasdaq: NVLS) and Lam Research (Nasdaq: LRCX) have all seen similar run-ups in recent months.
Much of the excitement and optimism stems not only from chip companies moving to smaller silicon and copper processing, but also the frenetic development of high-speed telecommunications and networking equipment.
Further validation of this demand came this week when the Semiconductor Industry Association said the chip sector will grow 20 percent annually through 2003. Unprecedented demand for communications of all kinds, including Internet access and wireless consumer products, is a strong force behind the optimistic forecasts, the report said.
Even some of the best-performing tech stocks of the past six months are expected to move higher.
Salomon Smith Barney analyst Jonathan Joseph upped his outlook on Micron Technology (NYSE: MU) to a "buy" from an "outperform" rating and set a price target of $100 a share. The analyst cited the possibility of an increase in DRAM prices next week as part of the reason for the increase.
Micron, which caught fire in the past two months, was trading around $81 a share, within a few ticks of its 52-week high. It also split 2-for-1 in May.
Last week, Intel (Nasdaq: INTC) got a shot in the arm when Lehman Brothers analyst Dan Niles started it with a "buy" recommendation. He also initiated coverage of Advanced Micro Devices (NYSE: AMD) with an "outperform" rating.
Even Microsoft (Nasdaq: MSFT), in its understated way, has helped along these stocks, predicting PC growth of between 12 percent to 15 percent through the next fiscal year.
Believe it or not, most analysts think the industry is just beginning its upcycle, putting a premium on chipmakers who operate their own manufacturing facilities.
Even National Semiconductor (NYSE: NSM), which had lagged far behind its competitors, has hit a bit of a groove.
On Thursday, it hurdled analysts' estimates, earning $134.2 million, or 68 cents a share, on sales of $595.3 million.
Despite all the rosy outlook, analysts say it's just a matter of time before all this capital spending will backfire, creating an overcapacity problem that will send profit margins south.
But until then, these companies, along with their investors, are getting it while it's good.
Sergio Non is on vacation.