A large U.S. brokerage firm downgraded its recommendations on 15 semiconductor stocks yesterday, the latest salvo to hit an already struggling industry.
Prudential Securities Inc. said in a research note yesterday that it made the changes because it believes that there is little reason for short-term optimism in the sector and that many stocks won't hit bottom until the second or third quarter.
In addition, two U.S. chip makers, LSI Logic Corp. of Milpitas, Calif., and Cypress Semiconductor Corp. of San Jose, Calif., issued warnings yesterday that first-quarter earnings and revenue would not meet analysts' expectations.
"It's in a recession right now," said Richard Woo, an analyst at Thomson Kernaghan & Co. Ltd. in Montreal, of the boom-and-bust sector.
The semiconductor industry, with much of its sales still tied to the slumping personal computer industry, is not the only technology industry subsector to hit the skids. Many other technology companies, from telephone equipment makers to fibre optics component firms, are also facing significantly slower growth.
ATI Technologies Inc. of Markham, Ont., was among the stocks hit in Prudential's flurry of semiconductor downgrades, being reduced to a "hold" from an "accumulate." Other semiconductor makers affected were Atmel Corp., Cree Inc., Insilicon Corp., Lattice Semiconductor Corp., Microchip Technology Inc., Pericom Semiconductor Corp., Sage Inc. and STMicroelectronics NV were all downgraded to "hold" ratings from "strong buy."
Alliance Semiconductor Corp., Altera Corp., Arm Holdings PLC, ATI Technologies, LSI Logic, Nvidia Corp. and Omnivision Technologies Inc. were cut to "hold" from "accumulate."
"Our industry has been impacted by the downturn in the PC industry," said John Challinor, spokesman for ATI, which warned last week that its second-quarter sales would fall well short of earlier estimates because of the slowdown in computer sales.
Mr. Challinor said the company expects "softness" for at least one more quarter, but won't forecast beyond that. "We're watching the leading indicators."
The Semiconductor Industry Association said yesterday that sales slipped 5.7 per cent in January to $16.9-billion (U.S.), compared with December, but were up 13.7 per cent compared with January, 2000. "The industry is currently experiencing lower sales due to an inventory overhang and deceleration in the end-equipment markets," said George Scalise, the association's president.
Although many analysts say the industry may take six months or more to recover, Mr. Woo said semiconductor makers' share prices already reflect the slump and are starting again to look attractive. "You've got to pick the cycle when it's down," he said. "Sell at the top and buy it when it's down -- we're in a down cycle right now."
The semiconductor industry has traditionally gone through up and down cycles of up to three years, analysts said. External factors, such as the Asian economic crisis of 1997-98 and the Taiwan earthquake of September, 1999, have also shoved the industry off its track.
But those cycles, analysts said, have now been shortened because the industry makes chips for a wider variety of products -- cellular telephones, pagers, personal digital assistants, set top boxes, children's toys, even cars -- that has meant less dramatic peaks and valleys, he said.
Duncan Stewart, a portfolio manager for Tera Capital Corp. in Toronto, said the industry, which first started seeing sales slowdowns about six months ago, likely won't rebound for another six to 12 months. He said he's again been buying some semiconductor stocks, such as Tundra Semiconductor Corp. of Ottawa, in recent weeks. "It's very hard to catch the bottom."
Prudential also rates some semiconductor stocks a "strong buy," including AXT Inc., Emcore Corp., Micron Technology Inc., Texas Instruments Inc. and Xilinx Corp. "These stocks exhibit various key characteristics we find compelling to buy them today," said Prudential in its note.