Cash In the Chips?

Have you checked the markets today? What a bloodbath. Everything is down, especially the chipmakers. Here's a quick survey of the damage as I write:

  • Intel (Nasdaq: INTC  ) , down close to 2%
  • Advanced Micro Devices (NYSE: AMD  ) , down nearly 5%
  • National Semiconductor (NYSE: NSM  ) , down more than 3%
  • Texas Instruments (NYSE: TXN  ) , down nearly 2%

It's as if investors have decided that chips are the world's worst business. And, well, they may be, if you believe a report this week from industry tracker Gartner (NYSE: IT  ) . Analysts there say that double-digit growth will continue through 2008 and then fall through the floor the following year. Specifically, the forecast is for sub-1% growth in 2009 and a massive consolidation in the industry that could put up to 350 firms out of business. No wonder investors are spooked.

But have the same sellers read the latest data from the Semiconductor Industry Association? The trade group, which represents more than 85% of the U.S. semiconductor industry, yesterday raised its forecast for 2006 global chip sales to $249.6 billion. That would represent a 9.8% increase from 2005 and is up from an earlier projection of $245 billion.

More interesting, however, is where these apparently conflicting reports converge. Gartner, you see, says that growth will be hindered by rising manufacturing costs. The SIA, meanwhile, says that the Asia-Pacific region will account for roughly 49% of 2009 chip sales -- up from an estimated 47% in 2006. (See this pdf chart for details.) Here's why that makes sense: Chip manufacturing is increasingly moving to Southeast Asia because of the oppressive cost of creating chip fabrication plants, which can equal $2 billion or more. How many firms outside of Intel have that kind of cash? Exactly.

So, as Gartner says, chipmakers seeking to fund growth will either spend billions to create new facilities (not likely), acquire capacity through buyouts (more likely), or turn to Asia (most likely). I believe many will choose the last option. Witness AMD, which just brokered a deal with Chartered Semiconductor (Nasdaq: CHRT  ) to expand its capacity on the cheap.

I've no doubt that Gartner is right and that the chip industry will face slowing growth in the coming years. After all, PCs are becoming more of a commodity daily, cell phones are a global phenomenon, and there are only so many ways to make a TV smart. Nevertheless, electronics drive our lives, and as complex gadgets become disposable, production costs become more important. And no one is better at making cheap, functional chips than Southeast Asian fabrication facilities like those owned by Chartered and its competitors. That's why, in the midst of this bloodbath, I bought shares in one of them today. Thanks for the opportunity, Mr. Market.

Intel is a Motley Fool Inside Value selection. Ask us for anall-access passto the service and you'll be privy to chief advisor Philip Durell's best picks, which are collectively beating the market by more than 4%. You'll also receive instructive lessons on valuation and company analysis. Give Inside Value a tryfree for 30 days.

Fool contributorTim Beyerswishes he could tell you which stock he bought today, but that would be violating the Fool'sironclad disclosure rules. Sorry.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 514063, ~/Articles/ArticleHandler.aspx, 7/24/2014 12:12:18 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement