Chips Near Bottom, Whatever That Means

SAN FRANCISCO -- We've now seen the upside to having an industry sector lose half its market value in six months.

Once you get around to the really bad news, you may have gone as low as you can go.

The trade group Semiconductor Industry Association said Monday that worldwide chip sales in January fell 28.6% to $15.3 billion from $21.5 billion a year earlier.

Sales also were off 11.9% from December.

"Worldwide semiconductor sales in January, historically a relatively weak month for the industry, reflected a continuing erosion of consumer confidence and the effects of the global economic recession," said SIA President George Scalise in a press release. "Sales declined across the entire range of semiconductor products, as sales of important demand drivers such as personal computers, cell phones, automobiles and consumer items remained under pressure.

As has been the case with overall industrial demand, the SIA's latest numbers merely indicate the speed of decline that happened at the end of 2008. Going back to October, year-over-year monthly chip sales fell, in succession, 2.4%, 9.8%, 22%, and now 28.6%.

The SIA, which isn't in the business to thrust bad news into the light, was similarly caught off guard. In November, the trade group had expected global sales would fall just 2.2% in 2008. Two months later, the reality was that sales came up nearly $13 billion short of expectations.

The story remains the same: A huge buildup in inventory has combined with the slowdown in demand for the main consumer items that drive semiconductor growth -- PCs, telecom handsets, and automobiles.

And little from those end-user industries has suggested demand is turning higher anytime soon. Dell's ( DELL) earnings report last week was perhaps unsurprisingly bleak, but even former untouchables like Apple ( AAPL) have felt the impact from the freeze on buying consumer electronics.

Analysts have been scurrying in the past few weeks to lower even further their expectations for computer sales in 2009. On Monday, Credit Suisse downgraded its expectations for PC unit shipment growth for Microsoft's ( MSFT) Client division, which sells the company's Windows operating system. Particularly distressing was that Credit Suisse now expects Windows shipments to fall 7.3% in fiscal 2010, down from expectations of 0.9% growth.

Similarly, evidence from the telecom sector is uninspiring. Oppenheimer cut its estimates for global handset shipments on Monday, saying that while smartphone vendors like Research In Motion ( RIMM) are doing comparatively well, it was re-jiggering its estimates for the likes of Nokia ( NOK), Motorola ( MOT) and Qualcomm ( QCOM) for expectations of a 15% decline in 2009.

And the auto sector? Let's not even go there.

However, if it's any consolation with the Nasdaq now within 5% of setting a six-year low, the SIA's report was not without a ray of upside. The group said inventory levels are very low and "there are some signs that forward visibility are improving." Of course, we don't know what that visibility is telling us, but the suggestion is we're closer to a trough in demand than we once were.

That's also borne out by the notion that as bad as January chip sales were, they do show a slowdown in the rate of year-over-year decline. As with the housing market, things won't start improving until the speed of decline begins to ease.

On the other hand, if you were somehow prescient enough to call the bottom in chip stocks in late November, you're one of the few investors not kicking themselves these days. The Philadelphia Semiconductor Sector Index is still up nearly 18% from those lows, and its 7% fall in 2009 is enough to make investors in other sectors jealous.

The issue for chip investors going forward is to discern what finding the bottom means for their stocks. Once some sort of recovery happens, how strong will it really be? The SIA's multi-year forecasts from November are certainly already obsolete, with the group's estimate of more than 7% sales growth in 2010 looking much too bullish.

Take Intel ( INTC), for example. Analyst estimates call for the company to post more than $32 billion in revenue in 2010, still well below what the company did in 2006.

That puts "recovery" in a more unfortunate perspective.

Chip stocks have been underperforming the broader market for more than two years. Their new role as market outperformer over the past three months is unusual (the S&P 500 is down about 15% in the past three months).

Investors may need to ultimately question whether an eventual rally in stocks is more or less likely to preserve this latest status quo.

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