December started with a bang and ended with a whimper for two of the largest players in the semiconductor industry, two analysts warned in research notes drafted Wednesday.
Influential analysts at Merrill Lynch and Lehman Brothers lamented a dramatic slowdown in the semiconductor industry in the past two weeks, which has stalled sales at Xilinx, the No. 1 maker of programmable semiconductors, and rival Altera. December started off on a healthy note, the analysts said, but sales completely tanked in the second half of the month.
Although analysts typically refrain from categorically bashing stocks, Lehman Brothers analyst Daniel T. Niles warned that all investors should "continue to avoid these stocks."
"We believe that negative (quarterly) growth for March is certainly possible," Niles wrote. "Given how poorly December ended, we will be interested to see what kind of guidance Altera and Xilinx give for March and the year, when they report."
Niles maintained his tepid "neutral" rating on San Jose, Calif.-based Altera but slashed his earnings estimates for calendar year 2001 to $1.15 per share from $1.20 per share. He maintained a "neutral" rating for San Jose-based Xilinx but cut earnings estimates for fiscal 2002 to $1.55 per share from $1.62 per share.
Even though he slashed his earnings estimates, he said he wouldn't be shocked if the companies failed to meet those revised targets.
"We believe that 1) both contract manufacturers and distributors, especially in North America, did not see the sell-through anticipated and therefore are cutting back on forecasts, and 2) due to a demand slowdown, the OEMs exited the year with more inventory than anticipated even a month ago," Niles wrote in a research note issued Wednesday morning. "We believe that semiconductor stocks in general will hit new lows...and that even these new estimates could still be too high."
"Too early to 'jump back in'"
Analyst Christopher Danely at Merrill Lynch also reiterated a near-term "neutral" rating and lowered his estimates for Altera. He cut his 2000 revenue estimate to $1.39 billion from $1.40 billion and the 2001 revenue estimate was cut to $1.73 billion from $1.85 billion.
Danely was slightly more optimistic about Xilinx, and he left his original estimates in tact. He expects the company to register sequential quarterly revenue growth of about 5 percent.
Danely cautioned that both stocks may eventually become attractive to high-risk, long-term investors, but now is not the time to invest in either.
"We believe it is still too early to 'jump back in'...as we believe the inventory correction will last at least one more quarter for Xilinx and one to two more quarters for Altera," Danely wrote in a research note issued Wednesday.
Danely based his recommendation in part on his sources at a company that supplies wafers to Altera. The sources told him that Altera has lowered wafer starts by at least 25 percent, indicating that sales will continue to be sluggish for the near term.
The analysts were also concerned about uncertainties resulting from recent investigations. Federal trade regulators said Dec. 18 that they have agreed to investigate a complaint by Xilinx that Altera is importing products that infringe upon Xilinx patents.
In a complaint filed in early December, Xilinx asked the U.S. International Trade Commission to bar Altera from importing or selling products in the U.S. that infringe on three Xilinx patents for field programmable gate array technology.
The technology allows customers to program customized information on the chips instead of buying more expensive custom-made chips. The process makes it easier to upgrade electronic devices even after they are built and shipped. Customers include Nortel Networks, Cisco Systems and Lucent Technologies.
The investigation comes after another high-profile investigation and court decision between the two rivals. In a suit filed in June, Altera alleged that Xilinx's Virtex product line encroaches on three Altera patents. On Nov. 17, Xilinx won a federal court ruling against Altera over the allegations.
Although Xilinx won that case, it took seven years to investigate and prosecute--and analysts are now concerned that another case could bog down both companies' talent and attention for years.