Microprocessors are the new cigarettes
JP Morgan urges chip CEOs to inhale
Chip companies need to start acting their age, according to a sage analyst.
Chris Danely, director of semiconductor research at JP Morgan, thinks the major semiconductor players should behave more like old-line companies in the tobacco, food and oil games. He'd like to see the chip firms manage their cash better and reward shareholders with larger dividends. He'd also like them to slash the hell out of their research and development budgets and stop acting like super fancy innovators when they're really just stodgy manufacturing machines.
"Think more like Phillip Morris and less like Google," Danely said. "I know it is very hard to talk like this."
Danely's line is especially hard to swallow out here in Silicon Valley where besting the competitive turmoil that stems from Moore's Law through innovation is meant to be the goal. But that didn't stop Danely from cramming his pitch right down the gullets of Valleyites during last night's annual "Semiconductor Forecast" event held by the Churchill Club.
Other speakers at the event echoed some of Danely's underlying sentiments. The rather mature chip industry looks much less volatile nowadays as compared to even just 10 years ago when boom and bust cycles were the natural companions of silicon. Now, we find an industry that grows revenue at about 10 per cent per year or twice the US GDP.
"There are tons of industries out there that would love to have 10 per cent growth," Danely said. "Now that we are out of this hyper-growth phase, it is time to run semiconductor businesses more like a normal company."
Danely seemed quite taken with Mark Hurd's approach at HP, celebrating the decision to "cut some unnecessary R&D projects" and to manage cash "very efficiently."
Speaking about the chip industry in this way certainly removes a bit of its luster. But Sangeeth Peruri, another panelist and managing director at big money house J. & W. Seligman & Co., said that the chip industry's maturation and stabilization opens up some new opportunities for investors.
Investors now have the time to take closer looks at companies' fundamentals and management. So, you can buy into a company after careful study, worrying less about whether you're timing the purchase for the right cycle, since the cycles are less dramatic these days.
"You used to get killed if you got the cycles wrong," Peruri said.
A number of the analysts expressed concerns over the US tax rebate handed out this year. They expect the boost to fade in the coming months and wonder how that dwindling cash will combine with still struggling banks and a still grim housing market.
"I think we are going to have a recession," Peruri said. "I don't know when it will hit."
But things aren't all so grim.
In Bradford some might say "nay!" I say "don't be so daft" innovators to stop innovating? In IT that seems to be tantamount to saying "Let's go bankrupt slowly with a rather rapid finish".
Have a quick look at JP Morgan's own figures.
Would you take advice from a company that has suffered an over 50% reduction in profits for the first quarter of 2008 compared to 2007?
Especially when the only reason for this drop was their own extremely poor decision-making in the last two/three years.
Compare this to Intel, which had a 23% increase in income over the same period, and AMD which had around 30% increase.
Intel did make less profit than predicted (I can't find actual figures for that), while AMD still made a loss.
However, AMD's loss in the first quarter 2008 was 41% smaller than in the same quarter last year.
So - a company that has just taken over 50% less profit is giving advice to companies that have had improvements in net profit of around 20 to 41%.
To top it off, this 'advice' is coming from someone who clearly has no idea how a technology/innovation-based market works. It's very simple - those who innovate in the right way, survive. Those who do not innovate (or who innovate in the wrong ways), fail.
The clue is in the name of the market segment...
Actually tbe sub-prime mortgage thing was caused by the US government mandating that mortgage lenders *had* to provide mortgages to high-risk borrowers, those below a certain income threshold with known credit problems who most lenders wouldn't normally touch with a barge pole. They were forced into the situation that created the problem. That same government (the faces change but the government is always the same) is now proposing solutions to the sub-prime problem they created - solutions that will actually make it worse.
Which just proves my idea that when there's a problem, first look to see if the government started it. They usually did.