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Thursday, October 05, 2006

Wishful Thinking From Semiconductor Manufacturers

By William Trent, CFA of Stock Market Beat

It seems the semiconductor industry is beginning to think they have the whole cyclical thing figured out now.

Is It Goodbye to Boom Bust Cycle? - Electronics Weekly
The semiconductor industry is moving away from the boom bust cycles and toward steady growth, according to the head of one leading U.K. chip companies.“We used to do this 16, 17 percent growth per year and then went through this correction,” said Hossein Yassaie, CEO of Imagination Technologies. “Now it will be a steady 8 to 12 percent for the foreseeable future. I believe we will not see the cycle again and all the customers I talk to understand and agree.”
That was partly backed up by the chief economist at ST Microelectronics: “The last big peak was 2004 and usually there should be a big drop, but everything is looking at 7 percent growth,” said Jean-Philippe Dauvin, who is also on the WSTS world semiconductor statistics board. “I recognize that now the cycle seems to be smoother.”

If they are so convinced that demand will be up a steady 7% per year (they are probably a little optimistic) why are they ordering 70% more semiconductor manufacturing equipment than they did last year? As anyone in the chemical industry could easily tell them, cycles aren’t caused by swings in demand - they are caused by swings in supply. And supply is starting to swing toward the side of “too much.”

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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