Chip Fundamentals Stay Strong Amid Correction

Editor's Note: This column appeared exclusively on RealMoney on Monday, March 22, and is running now as a special bonus for TSC readers. For a free trial subscription to RealMoney and other semiconductor coverage, click here.

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I've been as surprised as anyone at how far the chip stocks have corrected this year. I won't try to explain it after the fact, because I didn't see it coming -- and I should have.

However, after checking in with my old industry contacts, I remain very enthusiastic about this industry's upcycle. Book-to-bill ratios are still strong, over 1.0. Pricing is firmer and order lead times are lengthening. Industry excess capacity has been absorbed, and managements are preparing for a sequentially stronger second quarter and second half.

Eventual Recovery in Corporate Demand

In 2003, when semiconductor industry sales grew 18%, consumer electronics drove most of the growth, as corporate IT spending never really got going. So it's no wonder that this year's first quarter has seen seasonality in computer sales and some inventory backup. Corporate demand for computers still isn't recovering much, but it will eventually, and that will help drive chip sales higher. ...