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Chip Investors' Short Memory

A few glimmers lift the sector while analysts wonder how anyone's still in business.

Evidence of growth in the sales and prices of semiconductors boosted memory chipmakers Wednesday, but analysts say it remains a sector in which companies continue to hope a recovery materializes before they're out of business.

The Semiconductor Industry Association said Wednesday that worldwide sales of semiconductors rose 1.6% to $10.6 billion in November -- the second-straight month of sequential growth. The group said personal computers, wireless communications, and automotive and consumer products "continue to fuel semiconductor sales and lead the industry out of its yearlong recession."

Meanwhile, World Semiconductor Trade Statistics reported that the global market for dynamic random access memory, or

DRAM, grew 17% sequentially in November, though this still represents a 68.7% decline year over year.

The report "is good news, but it had a lot to do with seasonal strength," said Dan Scovel, an analyst at Needham & Co. "December and January are typically anemic, so this may not hold."

Looking Forward

Morgan Stanley analyst Mark Edelstone is looking for overall industry revenues to be flat to down 2% in the fourth quarter and to decline slightly in the first quarter because of seasonally weak demand and lower backlogs.

Chip sales are considered an important indicator for the overall economy because chips are found in a broad array of products including cars and refrigerators.

Edelstone expects sequential revenue growth to resume in the second quarter and to accelerate in the second half of the year. "We continue to believe that revenues in 2002 will be flat to down 5%," he said, adding that he expects most stocks in the group to see some "profit-taking" over the near term after such a huge run-up in the fourth quarter.

Sox Pop

The Philadelphia Semiconductor index zoomed 43% last quarter as revenue growth bottomed in September and earnings disappointments began to dissipate. The index rose 2% to 534 on Wednesday.

Banc of America Securities analyst Douglas Lee said the industry is fixing its supply problems by cutting inventory and capital expenditures and by laying off employees.

"But the problem is demand," he said. "It's difficult to pinpoint a major technology company that buys chips that is doing well. Until they start to feel better, growth will probably be weak."

Though analysts have been encouraged by the broadening in the industry over the past couple of months, with more product categories showing volume increases, they note that pricing remains "difficult."

"Pricing still has a fairly long way to go to get back to levels where these companies are even making money," noted Paul Leming, an analyst at ABN Amro.

Indeed, spot DRAM prices got down as low as $1 per 128 megabits, according to Lee, while cash costs were about $2 or $3. When the cost of production is greater than selling prices "it makes no sense to be in business," he said.

Still, DRAM prices have recovered somewhat recently, and Korea's

Hynix Semiconductor

said it recently raised contract chip prices by 30% on average after raising them twice in December.


The company said the move was to reflect price changes in the spot market, but a spokesman told


that the price hikes were due to increased sales of personal computers as a result of Windows XP and a PC sales boom in China.


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noted that

Samsung Electronics

is also considering raising contract chip prices.

"The reality is that pricing got to levels that would have driven the industry out of business inside of two years," said Leming. "It's headed from an unstable and unsustainable position back to a more healthy position."

Salomon Smith Barney analyst Jonathan Joseph said the spot price on 128 megabit synchronous DRAM, or SDRAM, rose 16% last week to $2.17 from $1.88, while double-data rate DRAM, or DDR, rose 3% to $3.38 from $3.30.

"The fact is, someone is buying memory and betting they can sell it later on," said analyst John Geraghty at Gerard Klauer & Mattison.

Still, he conceded that it is unclear whether memory prices have gone up because of increased demand or because supply has been restricted.

Deck Chairs

Analysts say consolidation in the chip industry could be one supportive fact over the next few months. Talk has been rampant about a possible combination between


(MU) - Get Report

and Hynix recently, and Micron agreed in December to buy a U.S. chip plant from Japan's



"The recovery has begun and will be ongoing, but there's a risk that the pace and magnitude of the recovery will be anemic this year," noted Amro's Leming.

Chip stocks rose Wednesday with Micron up 7.2% to $33.24. The stock climbed a whopping 64% last quarter. Meanwhile,


(INTC) - Get Report

rose 4.9% to $33 after surging 51% in the fourth quarter, and

National Semiconductor


rose 3.7% to $31.93 after surging 37% last quarter.

In Korea, Hynix finished up 15% at 2,780 won, and Samsung closed up 10.4% at 308,000 won.