Tech and Telecom Inventory Shifts to Neutral

Usually, once each quarter, I will opine on the state of inventory within the technology and telecommunications supply chain. As subscribers to The Telecom Connection know, I track, analyze and report on more than 450 companies throughout earnings season. Sometime thereafter, I'll post a comment on RealMoney about the state of the supply chain.

In the graph below, you can see the inventory ride over the last seven years. Don't be startled by the spike up in the first quarter of 2008 to 116 days from 107 days exiting the December quarter. That level was unsustainably low. As I have noted before, the optimal level of inventory for the total supply chain appears to be in the 113-116 days range.

If you look at the two components of the supply chain -- semiconductors and customers (everyone else) -- semiconductor inventory remains within a fairly tight range over the entire time frame. We exited the March quarter with 70 days of semiconductor inventory, and 70 days or less is really the optimal level for this group. Here again, the drop to 63 days in exiting the fourth quarter was far too lean, as it can take eight to 13 weeks to process a wafer, depending upon the part type.

On the customer side, inventory was 45 days and fully consistent the 44-46 days that appears to be optimal for the industry. What is interesting over time is that the bulk of the inventory reduction from the total supply chain has come from the customer side without a corresponding increase on the semiconductor side, demonstrating how much more efficient the total supply chain has become.

Click here for larger image.

Over the next couple of weeks, we'll get the usual array of negative pre-announcements, and investors will start to worry. Then, like clockwork, with the first wave of reports, some sell-side analyst will announce that there's inventory building up at semiconductor companies, according to a handful of reports. The exact same thing took place in April, and there are two things to keep in mind when it does. First, semiconductor inventory usually increases as we are exiting the June quarter. It ramps to feed the back-to-school builds that will take place at OEMs in July and August.

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At time of publication, Faulkner had no position in the stocks mentioned.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Faulkner appreciates your feedback; click here to send him an email.

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