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.
On a more positive note, Peruri theorized that a weakened dollar could aid PC sales. "As the Fed weakens the dollar, that is making Intel CPUs and Dell and Acer computers effectively cheaper around the world. It is possible that the combination of Intel and AMD competition, CPU price points coming down and the dollar being depreciated could cause demand to accelerate for PCs."
In addition, Mark Lipacis, a managing director at Morgan Stanley, sees room for optimism around the state of the telecommunications market. The big telcos have less debt than in years past and are facing a lot of competition from the cable companies. In addition, it looks like their networks will be flooded by serious bandwidth over the next couple of years due to rising video and audio traffic. "We say that YouTube is the new Solitaire," Lipacis said.
"These guys can spend money if they are motivated, and the cable companies are the motivation," he added.
So, that's good news for chip makers who get their silicon into things like routers and switches, according to Lipacis.
Putting their mouths where their speculation is, the money men agreed to pick a few stocks for the Churchill crowd.
Danely urged the audience to consider Microchip Technology (MCHP) because it's "competing against stiffs" like Freescale and STMicroelectronics.
His next pick - AMD - was a bit harder to justify.
"From a stock perspective, they are trading like they are going out of business," Danely said, as the crowd erupted in laughter. But Danely is confident that Intel will face growing product delays and that AMD will reach profitability by the end of the year.
Lipacis latched onto PMC-Sierra (PMCS), saying that the company should benefit if his telecommunications spending thesis is right. "It is a classic momentum name," he added, emphasizing the exacting standards that Wall Street analysts try and reach. (And the momentum is inspiring.)
Lipacis also backed Texas Instruments (TXN) on the premise that "people hate that stock" and going against the grain is sometimes a good thing.
Dan Niles, the CEO of Neuberger Berman Technology Management (part of Lehman Brothers), tried to sell the audience on Skyworks Solutions (SWKS), which has gotten rid of some under-performing businesses. And he cheered Applied Materials (AMAT) because the company is reworking semiconductor manufacturing machines to make cheaper solar cells. You may not be able to pick the solar cell maker that will last through the boom and inevitable bust in alternative energy, but you can profit from the company selling all of the vendors the tools to make their gear, goes the thinking.
Peruri, who in our experience is one of the best informed money men out there, opted to back Marvell (MRVL) because it has a history of innovation and seems poised to get on the right track. And he pointed to ON Semiconductor (ONNN).
Of course, you could forget these boring chip makers altogether and go find yourself a nice cigarette company to back. ®