Chips a Tenuous Source of Strength

Lehman Brothers analyst Tim Luke said the semiconductor cycle typically has four stages: a decline in unit volumes followed by a decline in average selling prices, new demand, and supply and demand equilibrium.

"We believe the majority of our universe is in the third stage," he wrote Tuesday. "We remain comfortable with [capital expenditures] budgets moving higher, and we do not foresee a situation of overcapacity for the remainder of 2004."

Such views run afoul of the current conventional (bearish) wisdom that the chip cycle has peaked. Despite its recent upgrade for 2004, the SIA's current forecast is for 2005 growth of just 6%. Furthermore, some analysts have noted a buildup in inventories -- a potential red flag.

But Steve Tobak, co-founder of Invisor Consulting and a longtime semiconductor executive, said strong bookings and high capacity utilization have led some companies to build inventories to be sure they can fill orders.

"Companies got very conservative during the downturn. This is a sign that the industry is returning to normal," Tobak said.

A.G. Edwards analyst David Wong added that strong growth in motherboard shipments in March and April indicated that June-quarter desktop PC shipments could grow faster than expected, which is something Microsoft (MSFT Quote) forecast in its fiscal third-quarter results. That, he said, bodes well for Intel (INTC Quote), the world's largest semiconductor maker.

Investors will get a better sense of the state of the PC and chip industries Thursday when Intel executives hold the company's regularly scheduled meeting with financial analysts. The company also will present a midquarter update in early June. Separately, Texas Instruments (TXN Quote) is holding an analyst meeting on Wednesday.