Lehman Brothers analyst Dan Niles issued a gloomy report Monday predicting that semiconductor revenues would drop 18 to 20 percent in 2001, worse than the previous record of a 17 percent drop in 1985.
Niles cut estimates on Intel, Texas Instruments and Cypress Semiconductor. He wasn't alone. Prudential Securities analyst Hans Mosesmann also issued a downbeat report on the semiconductor industry, and Salomon Smith Barney analyst Jonathon Joseph dropped his estimates on Intel, citing weak flash memory and component sales.
In midday trading, Intel was down slightly to $23.05, Texas Instruments dipped 62 cents to $27.64, and Cypress was down 71 cents to $15.05. Intel's stock was knocked in overseas trading last week by news that the European Commission is investigating the company's marketing practices.
"We believe that history does repeat itself, and this is definitely worse than 1996 and could be like the mid-'80s for semiconductors," Niles wrote.
A weak economy, inventory issues, and the death of big-spending by dot-coms and Old Economy companies are all factors in the chip slump, Niles said.
"In 1996, the demand issues for the semiconductor industry were limited to the PC market, while wireless and networking were showing strong growth," he wrote. Niles said all three of these markets are slowing, with the high-flying markets such as wireless and networking decelerating the fastest. Companies have seen trouble with inventory from a few sources, while spending from dot-coms and Old Economy companies has slowed dramatically, stopping altogether in some cases. And bankrupt companies are putting their hardware up for auction, with Cisco Systems, EMC and Sun Microsystems products selling for 10 to 20 cents on the dollar, Niles said. "We have heard that many of these companies are actually buying back their own equipment so their own products do not compete against themselves on price," Niles said.
And as long-term contracts come up for renewal, pricing pressures could mount. Niles said he thought that issue would come to bear in the third and fourth quarters "when customers start to reorder in a meaningful way."
"We believe it took 9 to 12 months to create this supply-demand imbalance and that it will take a minimum of another 6 to 9 months to hit bottom," he said.
Niles lowered Intel estimates for 2001 from 70 cents per share to 65 cents, and for 2002 from 80 cents to 75 cents per share, noting that "non-processor revenues for Q1 and orders for Q2 are absolutely horrible." He said flash and wireline integrated circuit revenues will be down 30 percent in the first quarter compared with a year ago, and should be down another 10 to 20 percent in the second quarter.
He cut Texas Instruments earnings estimates for 2001 from 75 cents to 65 cents per share, saying, "we believe that TI saw a weak finish to the quarter...Looking into the second quarter, we believe that semiconductor revenues will decline by at least another 10 percent quarter-over-quarter with margins taking another hit despite the drastic cost control efforts."
And Niles dropped estimates for Cypress from $1.36 per share to 50 cents for 2001, and from $1.78 per share to 75 cents for 2002. Cypress had warned investors in March that it would reduce revenue expectations for the first quarter.