Not again! We're finally seeing signs of life after a long winter of stock market discontent, but now the high-valuation beast is rearing its head once more. Chipmaker Xilinx (NASDAQ:XLNX), for example, sports a forward P/E ratio of 42.
Is the outlook for the semiconductor market robust enough to support a valuation of 42 times next year's projected earnings? The painful consequences of "irrational exuberance" should be still too much with us for any investor to buy into these types of multiples and the fantastic growth outlook they suggest.
That is not to say a firm like Xilinx has not built a solid business with positive growth projections. The company, which makes programmable chips for high-end switching and routing devices -- and counts Cisco (NASDAQ:CSCO) and Lucent (NASDAQ:LU) among its customers -- said this week it expects a 6% to 9% sequential increase in third-quarter sales instead of its previously forecasted 4% gain. That translates into a strong year-over-year gain of 29% to 33%. Good news, but the company remains vulnerable to the quickly changing fortunes of a cyclical business.
Yes, things are looking chipper right now in the semiconductor industry. Thanks to increased demand for Internet bandwidth and wireless communication both in the U.S. and abroad, the overall market has been heating up recently. Chip sales rose 16% year-to-date over the previous year, the Semiconductor Industry Association said Monday. But how long will the good times last? Not very long, according to the Association, which expects annual sales growth to slow to 5.8% in 2005.
Xilinx CEO Willem Roelandts doesn't seem to think the boom will last very long either. Why else would he have sold a good chuck of stock in the past two months, leaving him with a mere 67,000 shares? More importantly, he's not the only insider selling. In the past six months, Xilinx executives have sold 735,000 shares and purchased none. Do they think the recent rally in the stock price might not be sustainable? There may be other reasons for this insider selling, but it does raise a red flag.
Xilinx is a good company and a leader in the programmable chip industry. But the future may not be as rosy for this sector as the market would have us believe. Investors vote with their feet, and when insiders flee to the exit doors, the rest of us may want to be ready to follow their lead.
Carla Pasternak welcomes your feedback at [email protected]
