The ongoing semiconductor market bonfire received some more gasoline today as the sector-wide rally continued with several big one-day gains. Many traditional news sources cited bullish comments from sell-side analysts as providing the latest dose of fuel, with Salomon Smith Barney, Chase H&Q, and Deutsche Banc Alex. Brown all making moves on either the ratings or earnings estimate fronts today. While that's as valid a short-term explanation as just about anything else, the sell-siders are really just a reflection of the overall exuberance in the chip market right now and not a main cause of it.
Widespread speculation that DRAM prices in the spot market have bottomed out helped boost Micron Technologies(NYSE: MU) $19 15/16 to $98, making the company one of the biggest percentage gainers on the New York Stock Exchange today. Other outsized movers included chip connection technologies developer Rambus (Nasdaq: RMBS), which gained $60 5/8 to $301 5/8, and logic device maker Atmel(Nasdaq: ATML), which picked up $5 7/8 to $49 1/2. Elsewhere, Xilinx (Nasdaq: XLNX) rose $9 1/2 to $79 3/4, Altera(Nasdaq: ALTR) gained $8 1/4 to $79 3/4, Cypress Semiconductor (NYSE: CY) jumped $5 11/16 to $45 3/4, and Motorola(NYSE: MOT), which announced plans for a three-for-one split, ran up $12 to $170 1/2.
For the most part, the investor optimism that last year centered almost exclusively on the communications chip segment of the market has spilled over into almost every other segment of the chip business. Companies as diverse as microcontroller maker Microchip Technologies(Nasdaq: MCHP) to wafer fabrication systems maker Novellus Systems(Nasdaq: NVLS) to DSP "blue chip" chipmaker Texas Instruments (NYSE: TXN) all hit 52-week highs today. Of course, the comm chip guys also gained ground, too, with PMC-Sierra(Nasdaq: PMCS) adding $14 5/16 to $193 1/16 and Broadcom(Nasdaq: BRCM) rising $15 7/8 to $197 3/8.
All systems appear to be "go" for the industry, which is in the upswing of a buying cycle that many believe is still in its initial stages. Analysts meeting today at a European symposium sponsored by trade group Semiconductor Equipment and Materials International (SEMI) reaffirmed predictions that the industry's growth will accelerate to 25% this year from last year's rate of 18%, with super-fast 40% growth in 2001 not out of the range of possibilities. That's a high enough growth rate to catch the eye of even the most jaded and growth-obsessed Internet or biotechnology investor.
The histories of previous chip cycles show that strange things start to happen when the growth rates get this heady. Demand and supply have a tendency to get out of whack as over-profitability leads to over-investment in the industry, which in turn leads to eventual over-capacity and brings the growth tea party to an abrupt halt. This is exactly what happened in late 1997.
Like in late 1997, demand as measured by SEMI's monthly bookings data from North American chip equipment makers is currently sky-high, with bookings coming in at $2.18 billion in January. That's 33% above the $1.63 billion in bookings at the last cyclical peak in November 1997. The big difference, though, is that January's shipments, which monitor the supply situation, were only 74.4% of bookings. Said another way, the industry's closely-watched book-to-bill ratio is currently 1.34. In November 1997, the book-to-bill was at 1.00 -- a short-lived supply and demand equilibrium that preceded 14 straight months where the ratio signaled over-supply.
Just when -- and for what reasons -- the industry teeters over the brink and falls from a situation of under-supply into over-supply is the critical question for many investors. Even though demand looks limitless right now, it most certainly is not. Understanding what is cause and what is effect should help the long-term investor differentiate between what is rational and what is irrational in today's high-flying chip market.
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