Sleepy Semiconductor Scene Suddenly Starts to Swing

Fund managers scouting for signs of good times at a chip investment conference leave satisfied.
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SAN FRANCISCO -- This time last year, there were few signs the chip market would soon rebound from its two-year slump. But now money managers here at the BancBoston Robertson Stephens Semiconductor conference cannot say enough good things about semiconductors.

Semiconductors are back. Memory prices, often used as a barometer to gauge the health of the chip industry, are firming. PC chips are selling fast as more and more PC makers offer super-cheap computers at near give-away prices and all a buyer has to do is sign up with an Internet service provider. Chip equipment makers are reporting rising orders and predict vast purchases of equipment by chipmakers over the next five years because of new chip designs and manufacturing processes.

And communications chip manufacturers, who have already seen their stock prices soar, cheerfully point to a flood of new consumer products coming onto the marketplace beginning this year that will drive revenues and margins even higher.

Even PCs, which were given their death sentence by

IBM

(IBM) - Get Report

CEO Louis Gerstner early last year, are expected to do well over the second half of this year. "We are just starting to see that now," said Mario Morales, an analyst at market research firm

International Data

. "It is all being driven by the low end."

Micron Technology

(MU) - Get Report

spokesman Kipp Bedard said that memory spot market prices were near an all-time low of about $4 per 64 megabit DRAM a month ago but have since climbed to between $5 and $6. And contract prices offered to top-tier computer makers like

Dell

(DELL) - Get Report

are also rising. "Demand there looks great," Bedard said, adding that the computer makers seem to be aggressively stocking up on inventory in anticipation of back-to-school sales. This increase in business wasn't expected for several weeks. "The biggest concern we have is misreading the market and not having enough product."

Jon Gruber, portfolio manager of San Francisco-based

Gruber & McBaine

, said he had shorted Micron last month but recently reversed his position after visiting the company's Boise, Idaho, headquarters on his way to the wedding of the son Thomas Weisel, head of investment bank

Thomas Weisel Partners

. At Micron, he learned that the company had convinced

Compaq

(CPQ)

to stuff more memory into each of its budget-line PCs, and that should boost the whole memory market.

"The Compaq program has driven all the other computer makers to put more memory in the box," Gruber said. "I said to myself, This stock is going to be a monster. So I covered my whole short position and went long. It turned out to be a very profitable wedding."

The chip rebound has taught many money managers not to delay when they see a good value. Kevin Landis, portfolio manager of

Firsthand Funds

, boasted 118% return over the last 12 months in his

(TVFQX)

Technology Value fund because of investments in hot communications chipmakers like

Vitesse

(VTSS)

and

TranSwitch

(TXCC)

. But Landis said he kicks himself for staying out of

Hi/fn

(HIFN)

, which rose more than 300% this year.

Now with many of the communications chipmakers already carrying high valuations, money managers are looking at semiconductor equipment maker stocks, which are believed to be at the very beginning of a rising three-year cycle.

Joe Bronson, CFO of equipment bellwether

Applied Materials

(AMAT) - Get Report

, told fund managers he predicts a huge boom, propelled by cheap PCs, new gaming machines like the

Sony

PlayStation and

Nintendo

console. This translates to new equipment. "There is a lot of euphoria in the business," he said. "And certainly the business looks pretty good."

BancBoston

analyst Sue Billat said Applied Materials and other equipment giants are outsourcing more to smaller companies for components. "There is a whole new layer of companies who are the suppliers to the suppliers," she said. "Companies like

Advanced Energy Industries

, which have a speciality. In the case of Advanced Energy, it's in power supply management." BancBoston is not an underwriter of Advanced Energy.

Meanwhile, even companies that have already seen dramatic surges in their stock prices say the good times aren't over. Last year

Texas Instruments

(TXN) - Get Report

soared thanks to the exploding market for cell phones, which require digital signal processors, TI's key product. But the company is expecting increased sales of cable modems, and that should drive revenue for several years out. This year "will be noted as the year the infrastructure deployment became real, but 2000 will be the year it gets interesting," said TI executive vice president Rich Templeton. "And I really believe 2001 is when this thing really gets to be fun."