Following some positive statements by Intel, several stocks in the sector gained 2 percent to 5 percent Thursday. The optimism stands in sharp contrast to a month of gloomy analyst reports, although analysts warned investors not to forget that the sector still faces tough times through next year.
"On any given day the market can do what it wants," said chip analyst Dan Niles, who projected slowed chip demand until the middle of 2001 in a report Wednesday after Altera warned that growth would likely be at the low end of estimates.
Wednesday, for example, some bearish analyst reports pushed the shares in the sector lower.
Intel, the world's biggest semiconductor maker, helped counter that pessimism when it said late Wednesday that fourth-quarter estimates were on track, with sales growing by 4 percent to 8 percent. The news sent its shares up $2.06, or 4.60 percent, to $46.94 in late trading and helped push up other stocks as well.
The Philadelphia semiconductor index gained 2.33 percent Thursday, compared with a 4 percent loss on Wednesday. Xilinx gained $1.69, or 2.5 percent, and Altera gained $1.19, or 3.65 percent, after both stocks lost considerably ground Wednesday. KLA-Tencor rose 69 cents, or 2.1 percent, and Lam Research rose 88 cents, or 4.7 percent. Both companies declined Wednesday on analyst downgrades.
But Thursday's news did little to ease the concerns of J.P. Morgan analyst Terry Ragsdale, who said he remains worried that chip buyers, such as PC makers and cell phone companies, still have bloated inventories and will further reduce purchases.
"The market understands about slowing demand for PCS, cell phones and electronics products, but what the market does not specifically understand is that can translate into inventory problems," Ragsdale said. "I don't think that the possibility of declining inventory is priced into earnings estimates or stock prices.
"If I don't see further indications of slowing (chip sales) and inventory issues by the middle of December, then I'm going to be worried that my call was wrong, but I'm not looking for it to be reconfirmed every day," he said.
Niles and Ragsdale issued reports Wednesday painting a bleak picture for the chip industry, saying that companies have stockpiled inventory, and thus the chip sector will likely see a decline in orders over the next two quarters.
Niles issued his report after Altera, which he had downgraded earlier in October, came out with news that its fourth-quarter sales would be on the low end of estimates.
Ragsdale's analysis came in the form of a sharply worded report titled, "Downgrading the sector: Yes, it's late, but there's more bad news to come."
The first lines of Ragsdale's report outlined his skepticism of the industry. "At long last, we are backing off from our universally bullish call on the semiconductor sector and the semiconductor cycle," he wrote. "Nobody needs to remind us that we're late."
He continued: "Supply has risen and continues to do so, and the weaker-than-expected demand has brought the supply and demand curves together sooner than we expected. We see considerable risk of earnings misses for the next quarter or two."
Thursday, however, the chip sector shook off those concerns--at least temporarily. On top of Intel's news, specialty chipmaker Xilinx added its own upbeat announcement, saying that distributors' sales rose at a double-digit rate in October compared with the first month of the second quarter, and it assured growth by at least 12 percent for the third quarter.
Meanwhile, at its semiannual forecast dinner Wednesday, the Semiconductor Industry Association raised its near-term revenue forecast. The group now expects revenue to grow 37 percent in 2000, up from a previous estimate of 31 percent.
However, the SIA lowered its 2001 growth rate to 22 percent from 25 percent, and it lowered its 2002 estimate to 10 percent from 14 percent.
"I'm more interested in what's happening next year," said Niles, who maintains his skeptical outlook for the chip industry.
Other analysts, too, reiterated skeptical views for chip stocks in the near term. In a report released Thursday, Wit SoundView analyst Scott Randall lowered his industry growth estimates to 23.5 percent, from 26 percent, on inventory concerns.
"Weaker demand trends could result in inventory reductions at a sooner point in the cycle than we had been modeling," Randall wrote.