Rough Start for Chip Sales

SAN FRANCISCO -- The semiconductor industry got off to its worst start in six years, with January chip sales posting flat growth, according to a trade group.

And with the market for memory chips showing no signs of getting itself out of a rut anytime soon, a separate report from industry research firm Gartner halved its forecast for semiconductor sales growth in 2008.

"The DRAM market has been in recession since the start of 2007, and a weakening global economy now will not change the current DRAM market situation, although it may push the start of the recovery into 2009," said the Gartner report.

More importantly, Gartner pointed to weakening business conditions in the market for NAND flash memory, a type of chip used to store music in Apple's(AAPL - Cramer's Take - Stockpickr) iPod MP3 players, among other things.

"This [NAND] market witnessed a challenging end to 2007 and a rough start to 2008 because of continued oversupply and continued downward pricing pressure, and we see no respite in the short term," the Gartner report said.

As a result, Gartner forecast that global chip sales will grow 3.4% in 2008, instead of its previous estimate of 6.2% growth. That would mark the industry's second consecutive year of sub-4% growth.

The bleak forecasts underscore the beating that memory makers like SanDisk(SNDK - Cramer's Take - Stockpickr) and Micron(MU - Cramer's Take - Stockpickr)have taken in recent months. Shares of both companies are down more than 30% since November.

In a separate announcement Monday, Micron announced plans to collaborate with Taiwan's Nanya to collaborate on the design and production of advanced memory chips. The joint venture agreement -- currently a memorandum of understanding -- would allow the two companies to save costs as they develop next-generation memory chips with circuitry smaller than 50 nanometers.

Shares of Micron were off 34 cents at $7.18 in midday trading Monday.

The Philadelphia Stock Exchange Semiconductor Sector Index, which is comprised of 18 semiconductor stocks, was down 0.5% to 346.18 in midday trading Monday.

Worldwide sales of semiconductors in January totaled $21.5 billion vs. $21.47 billion at the same time last year, according to the trade group the Semiconductor Industry Association. The group cited a very competitive environment that has eroded average selling prices for chips and the products they go into, despite what it said was healthy end-market demand.

Virtually all product lines and all geographic markets experienced slightly lower sales in January, the SIA said.

As is typical in January, chip sales in the wake of the holiday season were down sequentially from December.

But January's 3.6% sequential decline in chip sales was more than twice as steep as the average dropoff of 1.7% during the past five years, according to previous SIA reports.

"The U.S. economy has entered a period of slower growth that may impact consumer purchases of electronic products," said SIA President George Scalise. "However, the emergence and growth of large consumer markets outside the U.S. has created new opportunities for chipmakers."

Unit shipments of cell phone handsets and PCs -- which account for roughly 60% of global chip sales according to the SIA -- were in line with expectations in January, the group said.