Another investment bank joined the increasingly dirge-like chorus on chip stocks Tuesday, revising its estimate downward for semiconductor sales growth in 2005.
Banc of America's John Lau, who simultaneously lowered his rating on
Advanced Micro Devices
from buy to neutral, said he now expects chip industry growth of just under 4% in 2005, down from an earlier estimated range of 10% to 12%.
The eagerly awaited cyclical sales peak for the chip industry "has prematurely come and gone," Lau said in a note. "We believe the confluence of excessive inventory, slowing GDP growth, terrorism concerns and high oil prices has led to the semiconductor cycle peaking in the early third quarter of 2004 time frame rather than early 2005 as we had originally anticipated."
The new outlook from Lau is exactly on target with the 4% growth forecast for 2005 predicted by the Semiconductor Industry Association trade group, which generates its number from a survey of member companies.
In an interesting reversal, the trade group's outlook -- usually viewed as excessively hopeful -- is actually more modest than the view of Wall Street analysts, who expect 9% growth for the top 100 semiconductor companies next year.
This time around, "the industry has it right, but perhaps it's the Street that's too giddy," suggested Needham analyst Charlie Glavin in a recent note that likewise counseled investors to adapt more modest growth expectations for chips. He expects 2005 sales growth of a mere 1% to 2% for the industry.
Lau also cut his earnings estimates and price targets for a handful of major players, including
, Advanced Micro,
For example, he trimmed his estimate on Intel's 2005 earnings per share to $1.24 from $1.42. The consensus estimate is $1.37. TI's estimate was reduced to $1.09 from $1.25, compared to the consensus outlook for $1.29.
Lau believes more analysts will follow suit. "We would not be aggressive buyers
of chip stocks yet, given that estimates for 2005 will likely be revised downward over the next few months," he said in a note.
In the meantime, he believes investors with long-term horizons could make money by investing in "high-quality semiconductor names such as Texas Instruments and Intel into the cyclical trough." But shares of high-beta names such as AMD have historically underperformed, added Lau, who downgraded the stock from buy to neutral. His firm has done banking for AMD within the past 12 months.
Lau said he's primarily concerned that AMD could suffer from price pressures in NOR flash, a type of memory used in handsets and PCs, which contributes over half its revenue. Incremental weakness in China, which has recently
been mentioned by a handful of other chip players, could also hurt AMD.
Shares of AMD were recently down 39 cents, or 3.2%, to $11.81.
Intel, which dramatically cut prices on its flash products in an effort to regain lost share, has since stabilized prices somewhat. But in another threat to AMD, Intel now has significant excess capacity in flash because it has been shifting to a more advanced manufacturing process.
"In our opinion, this does not bode well for the NOR flash market and will likely lead to increased pricing pressure over the next several months. Furthermore, we believe demand for NOR flash products for wireless handsets will be somewhat weaker than expected due to a handset inventory buildup in China," wrote Lau.
Most of the impact from weaker flash prices likely won't be felt until 2005 when AMD renegotiates flash contracts, he added.