Chip sector not out of woods yet

Chipmakers are expected to report improvement, but analysts said the semiconductor sector has yet to emerge from its three-year recession.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
3 min read
Chipmakers are expected to report some improvement when they post their quarterly earnings results in a few weeks, but analysts said the semiconductor sector has yet to emerge from its three-year recession.

"I think we're bottoming out and will skid along the bottom for several quarters," said Scott Nirenberski, an analyst with Credit Suisse First Boston. "I don't think we'll be in a rebound until the back half of calendar 1999, when PC prices tighten up."

Joseph Osha, an analyst with Merrill Lynch, said that, as chip companies prepare to report their earnings in the next several weeks, investors need to focus on global manufacturing capacity, distribution channels, and end user demand in order to gauge whether there are any true signs of recovery.

He cautioned against any rush to invest in chip stocks based solely on early signs of recovery, citing investors' frenzy earlier this year to pile back into DRAM stocks as it appeared DRAM prices were firming. What those investors failed to realize was that prices were beginning to stabilize only because companies were shutting down plants, running their factories below capacity, and restricting supply to the channel.

Ultimately, DRAM prices softened as companies were able to quickly ramp up production ahead of demand, since their factories were not being fully utilized. If the factories had been at full capacity, supply would have been constrained and prices would have been pushed up at a more conservative rate.

James Barlage, an analyst with Lehman Bros., also cautioned against declaring an end to the semiconductor slump. "The industry overall will see flat sequential earnings, but it will be down year-over-year," he said. "It will be a mixed bag when looking at things sector by sector."

Barlage noted, however, that the microprocessor sector fared well--relatively speaking--during the most recent quarter. He cited as evidence Intel's recent announcement that its third-quarter revenues would be between 8 percent and 10 percent higher than what Wall Street expected, due to strength in domestic and European sales.

First Call's consensus of analysts' estimates had pegged the chip giant's quarterly earnings, to be released October 13, at a profit of 80 cents a share. Although that figure would be a decrease from a year ago, when Intel posted a profit of 88 cents a share, it will mark an improvement over the company's previous quarter, when it reported profits of only 66 cents a share.

Analysts expect Advanced Micro Devices to show improvement for its current quarter as well, with a narrowed loss to 14 cents a share, compared with a loss of 22 cents a share posted last quarter and a loss of 45 cents a share posted for the previous period, according to First Call. AMD is expected to report its quarterly results October 6.

"AMD looks like it will be shipping more processors than it thought going into the quarter," Barlage said.

National Semiconductor, for its part, was able to beat analysts' expectations last month, when it reported a smaller-than-expected loss for its first quarter.

"The programmable logic guys are showing some signs of recovery and modest sequential increase, the analog guys are expected to be flat to down in the quarter, and the memory guys are still under a lot of pressure, although it's less than what it was in the second quarter," Barlage concluded.