Analysts: Don't count on chip rebound

Expectations for a "V" bottom in the second half of the year may be "overly optimistic," according to Salomon Smith Barney. Analyst Jonathan Joseph sounded a dour note on the outlook for the semiconductor sector, stressing the "truly awful" fundamentals of the sector.

In a research note, released Tuesday morning, Joseph, an analyst who has been ahead of the curve with calls about problems in the chip sector, said investors shouldn't count on a second-half rebound for the semiconductor companies. Using last week's profit warnings from Nortel and PC companies as examples, he pointed to continuing price erosion for computers, DRAM (dynamic random access memory) and flash memory, which is used in wireless devices.

Among leading chip stocks, Intel slipped 75 cents, or 2 percent, to $33.63 at the opening bell. Advanced Micro Devices moved up 29 cents to $25, while Micron Technology, which was dropped to "neutral" from "outperform" at Morgan Stanley on Friday, shed 43 cents to $42.12.

Until last week's batch of earnings from the likes of Applied Materials, Dell and Hewlett-Packard, many analysts subscribed to the notion that the economy and the tech sector would rebound in the second half of the year.

But last week, Applied Materials CEO James Morgan said the conventional wisdom about an economic rebound is a bunch of bunk. The first view is that the economy will rebound in the second half. The second is that the downturn will last all year. "We don't subscribe to either," said Morgan. "No one can predict the future accurately."

Now analysts are questioning the logic behind a recovery in the economy.

"If reports like Nortel's tell us anything, it is that investor hopes for a "V" bottom in (the second half of the year) may be overly optimistic, and managements, investors and analysts will likely be sharply lowering (second half) expectations in coming months," said Joseph.

Joseph said interest rate cuts from the Federal Reserve may prevent the sector from setting new lows, but projections for the second half of the year are still out of whack. The estimates of 54 percent growth from the first half to the second half of the year are not realistic, the analyst said.

"We believe estimates will continue to come down sharply in coming months as the market realizes there will be no material recovery in the second half," he wrote.

On the CPU (central processing unit) front, prices have continued to fall in recent weeks. Intel's Pentium 4 chip prices have slumped, with stronger demand for AMD's Athlon products than Intel's new offerings, Joseph said. The analyst said that this will probably continue until Intel begins shipping SDRAM-compatible Pentium products, which won't happen in volume before late in the third quarter.

Joseph also highlighted the downward pressure on spot prices for DRAM as the end of the second fiscal quarter approaches. "We have not seen an improvement in market segment yet; brokers are not even willing to predict where prices would bottom," the analyst wrote.

The outlook is much the same in flash memory, where despite some strength in the handset segment, prices have drifted lower. Joseph noted that most brokers see prices weakening further in the coming months.