Wall Street has stopped worrying about the chip slowdown, but there's no reason to feel better yet.
Traders and investors hardly noticed when chip-manufacturing equipment vendor Novellus Systems and chipmaker Altera issued cautions late Thursday. The former sees no signs of a second-half rebound, and the latter sees a sharper second-quarter decline than originally expected.
Warnings from prominent members of the semiconductor industry would have sent shudders through the stock market a couple of months ago, but instead, the Philadelphia Semiconductor Index gained more than 3 percent on Friday, outpacing the Nasdaq composite index and relatively broad technology measures such as the PSE Technology 100.
"Overall, there's really no good news at this time," Novellus CEO Richard Hill said during his company's mid-quarter conference call on Thursday. "All the regions are down. Most of the foundries, their capacities remain at 50 percent or below."
So, Novellus has no reason to believe in the kind of third-quarter recovery that its chief rival Applied Materials recently predicted for the industry.
New technology was supposed to be the one segment of the chip industry that would be insulated from the sectorwide decline, but orders for cutting-edge hardware are now being delayed.
One Novellus customer on Wednesday night pushed back an order for equipment to make 300-millimeter silicon wafers, which reduce a manufacturer's cost per chip compared to the 200-millimeter slabs currently used by most semiconductor plants.
"The recent push-out of a 300-millimeter ramp-up to fiscal 2002 from fiscal 2001 leads us to be concerned that other 300-millimeter fabs may follow suit," wrote analyst Edward White of Lehman Brothers.
Applied Materials' relative bullishness about the latter half of this year may lead some observers to conclude that Novellus' order slowdown is company-specific. But in the newest technologies, Novellus' position is large enough to reflect its industry, Goldman Sachs analyst Gunnar T. Miller believes.
"Because Novellus addresses the most leading-edge interconnect applications, one can only view this as further evidence that industry fundamentals continue to erode," Miller wrote. "We reiterate our cautious stance on the group."
Novellus and Altera also added to recent evidence of a technology slowdown outside the United States.
"In our international channels, we are experiencing a sharper decline in demand than we had forecasted and therefore, we have modified our second-quarter revenue guidance," John Daane, president and CEO of Altera, said Thursday. The company now projects a 25 percent drop in revenue from the first quarter, compared to its previous estimate of a 20 percent decline.
If Novellus and Altera are correct about their predictions, there's no reason to be excited about the chip market yet. A recovery might not start for another six months.
Yet chip stocks did well on Friday. Novellus rose 5.2 percent. Applied Materials gained 2.8 percent. Altera picked up 4.6 percent. Intel shot up 6.4 percent.
Even STMicroelectronics--which Salomon Smith Barney analyst Glen Yeung believes is the Novellus customer in question that put off a 300-millimeter order--lost hardly any ground. It was off just 32 cents to $35.23, despite announcing on Thursday a 21 percent reduction in its capital spending budget for this year.
The 300-millimeter order is for a joint venture of STMicroelectronics and Philips, Yeung wrote. A spokesman for STMicroelectronics said late Friday that it was possible his company delayed a Novellus order, but he couldn't immediately confirm it.
Another Novellus customer, Taiwan Semiconductor, is taking another look at the original schedule for upgrading its Fab 14 in Tainan, Taiwan to 300-millimeter technology. "We're close to that point, but we haven't made a decision yet," said Dan Holden, public relations manager for TSMC North America. "At some point, it would be equipped."
Chip foundries may be holding off on expansion, but Wall Street prefers to focus on the fact that technology executives don't believe things are getting any worse. After all, Novellus still expects to meet its original target of $220 million in bookings for the current quarter.
But the company's executives emphasized their success in taking share from competitors, not market growth. In fact, Novellus originally thought order cancellations would stop after the first quarter; instead, about $15 million of business has been canceled so far in the second quarter.
And Novellus, which typically doesn't fill many of its orders until late in a quarter, still has to fulfill at least half of its scheduled bookings for the current earnings period, several analysts noted in research reports released Friday.
"We believe the market will look favorably upon Novellus' reconfirmed bookings guidance," Credit Suisse First Boston analyst John Pitzer wrote. "However...quarterly bookings always tend to be back-end loaded. We believe that 50 percent-plus of the orders need to be booked in June. Guidance in our opinion is still at risk."
Leading companies in the chip industry will thrive when the economy recovers, of course. But until there are real signs of that turnaround, it's hard to defend the stocks. Notes Pitzer: "Valuation needs capacity orders; capacity orders (are) nowhere in sight."