"The bottom line is that the macro environment continues to be difficult with all PC & semiconductor companies having to adjust their business models to adapt," Edelstone wrote. "We think it is too early to call the bottom regarding the fundamentals of Intel or the PC & semiconductor industry as a whole."
Edelstone countered a Salomon Smith Barney report declaring that the chip sector can't get much worse.
That report, along with disappointing results from Elantec Semiconductor, sent stocks lower in early trading, although many recovered somewhat by midday.
With about 90 minutes left in regular trading, Elantec was off $5.88 to $28.03, Intel fell $2.04 to $26.08, and Rambus dropped 33 cents to $19.30. Lattice Semiconductor fell 39 cents to $21.51, Xilinx lost 57 cents to $40.57, and Broadcom fell $2.84 to $32.54.
Elantec, which makes integrated circuits for the communications industry, reported second-quarter results in line with expectations Thursday, posting a profit of $5 million, or 20 cents per diluted share, on sales of $30.6 million. But it warned that third-quarter revenue will drop about 20 percent from the second quarter because of lower demand and inventory buildup at its customers.
Inventory issues have been cited by just about every company in the semiconductor sector, as spending cutbacks by customers trickle back through the channel.
They were also a factor in Edelstone's report. In particular, he said an expected price cut on Intel's Pentium 4 chips could come sooner than anticipated, driving down margins. He dropped Intel earnings estimates for 2001 from 60 cents per share to 45 cents, and estimates for 2002 from 80 cents per share to 60 cents.
Outlook still bleak
But while that move may stimulate demand, the overall outlook for semiconductor stocks is not good, he said in a separate research note.
Revenue growth will continue to slow on a year-over-year basis until August or September, he said, and won't bottom out until the first or second quarter of next year.
"Industry revenue should decline about 20 (percent) in 2001, we estimate," he wrote. "A stronger economy and elimination of the inventory correction should promote low double-digit percentage growth in 2002, but commodity-product pricing pressure should limit upside potential, in our view."
Over the past few days, analysts have offered sharply different views on chip stocks.
Salomon Smith Barney analyst Jonathan Joseph upgraded several stocks last week, essentially saying that things had gotten so bad they were bound to turn around soon.
Joseph's contention that the bottom for the stocks was "only months away" goes against conventional wisdom; earlier last week Lehman Brothers analyst Dan Niles issued a research report calling the current environment the "worst year ever."
Both analysts cited inventory imbalances that have prompted companies to slash prices and have caused orders to wither away. But while Niles said that it would take the sector at least as long to get out of the mess as it took to get into it, Joseph said that order data indicated brighter times ahead.
"Based upon anecdotal order and shipment data...(it's) so bad it cannot continue for long," he wrote.
For Xilinx, Edelstone lowered 2001 earnings estimates to $1.14 from $1.15, cut 2002 estimates to 80 cents from $1.10, and dropped 2003 estimates to $1.10 from $1.55. He lowered his target price on the stock to $60 from $70 and his rating from "strong buy" to "outperform."
For Broadcom, Edelstone lowered his 2001 earnings estimate to 10 cents from 55 cents and his 2002 estimate to 60 cents from $1.40. He cut his target price on the stock from $130 to $60 and reduced his rating from "strong buy" to "outperform."
Edelstone cut 2002 earnings estimates on Rambus from 45 cents per share to 30 cents, based on higher-than-expected legal expenses. He also lowered his price target from $200 to $80. He also lowered earnings estimates for Lattice Semiconductor for 2001 to 90 cents from $1.05, and for 2002 to $1 from $1.30. He downgraded the stock from "strong buy" to "outperform" and dropped his target price from $40 to $30.