Despite growth, semiconductor sector falters

Effect of slow PC demand is exaggerated, analysts say
Written by Matthew Broersma, Contributor

Investors hammered semiconductor stocks Monday, even as experts were predicting the industry would see strong growth for several more quarters. Analysts said the market jitters come down to several factors, such as a perceived slowdown in PC demand and worries that semiconductor makers may be about to face dropping prices for commodities such as DRAM memory chips.

Semiconductors, a basic building block of high-tech products such as PCs and mobile phones, runs in boom-and-bust cycles brought on by alternating periods of oversupply and shortages.

Monday's dip came despite indications that the semiconductor industry is in the midst of its strongest sales growth since 1995, when growth was 38 percent. Worldwide, the industry is on track for sales of more than $231.6bn this year, an increase of 37 percent from 1999, according to market research firm Dataquest.

Investors may be worried that PC demand will be slower than expected, especially going into the important Christmas season. PCs, wireless and wireline products are the three main end products for semiconductors.

Those worries have been fed in recent weeks by profit warnings from Intel, Dell and Apple, all important players in the PC space.

However, demand alone does not have a decisive impact on semiconductor companies, according to Richard Gordon, principal analyst with Dataquest's semiconductor group. "It annoys me when you have people marking down stock prices and saying demand has gone away, the industry's in the toilet. Demand is only half the picture," he said.

Even with slow-growing demand, if the semiconductor companies do not have the production capacity to meet that demand, prices will remain firm and revenues will be strong, Gordon pointed out.

PC demand may be weaker than expected, but the market has exaggerated the effect, he argued. "Just because the shipments of PCs, mobile phones, et cetera have been overinflated, that doesn't mean the industry has to take a bath," Gordon said.

The demand problem has been aggravated because PC manufacturers, warned of impending shortages of memory parts in the second half, stocked up earlier in the year. Those purchases artificially inflated demand for the first two quarters, according to experts.

On Monday, the closely watched Philadelphia semiconductor index closed down 13.43 points, or more than one percent, at 785.96, a level not seen since early February.

Intel, which makes the chips found in most personal computers, closed down 7/8 to $39-1/8, a low not seen since early January. Intel warned in September that its third-quarter sales would fall short of analysts' expectations.

Texas Instruments, the world's number one maker of computer chips for wireless phones and high-speed modems, closed off $1-3/4 to $45-1/4, an 11-month low.

Rambus, a designer of memory chip technology, fell $8-5/8, or more than ten percent, to $71-3/8.

Canadian communications chip maker PMC-Sierra was down $9, or more than four percent, at $190-1/16.

Reuters contributed to this report.

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