Market does not share Sachs' optimism on chip upturn

Goldman Sachs, one of Wall Street's most renowned stock brokerages, appeared

to declare the current recession in the semiconductor industry to be all but

over. One of the firms' leading chip industry analysts, Terry Ragsdale urged

investors to "Buy chip stocks now’. ‘The recovery writing is on the

wall," the headline read in Ragsdale's report."

"We don't see how investors will be able to resist the inflection

point," said Ragsdale who added that conditions in the semiconductor

industry are no longer universally negative, and fundamentals are likely to

strengthen in the fourth quarter of this year even if the improvement is only

inventory-related. "The recovery may be uneven this time, limited by the

timing of demand reacceleration and historically high valuations, but we think

the stocks are headed up for now."

On Wall Street, Ragsdale's call to purchase fell largely on deaf ears as chip

stock ended the day lower after a brief and small up-turn after the report was

first released. There are continued reports that the industry is sitting at what

is presumed to be a bottom. How hard that bottom will turn out to be remains

uncertain. Skeptics point to a similar Merrill Lynch report in late July that

forecasted an upturn in chip activity. The next week, Lehman Brothers said it

expects Intel to "detonate a price bomb" on Advanced Micro Devices.

For the most part, more bad than good news is coming out of the chip

industry. Chipmakers who sell to the PC industry are expected to see their sales

to that sectors plunge 24 per cent this year, according to the latest industry

forecast issued by International Data Corp. Worldwide PC chip sales will fall to

$38 billion from $50.3 billion in 2000. The desktop PC semiconductor market will

be hardest hit, the report said, showing revenues sliding to $27.3 billion, from

$38.6 billion last year. Worldwide microprocessor revenue will fall to $22.2

billion by the end of 2001, from $27.1 billion in 2000. DRAM revenues will

decline from $12.4 billion to $6.6 billion during the same time. "PC

semiconductor suppliers have experienced a complete reversal of fortune,"

said the IDC report. "From March through August 2000, they worked

feverishly, struggling to fulfill extraordinary demand, but since then demand

has plummeted."

Most troublesome, IDC speculated that the market would not recover until

after 2005. And while Intel CEO Craig Barrett said last week that computer

shipments should improve later this year, he also forecast that

telecommunications equipment sales would probably not step up until late 2002.

"Computing is more stable. We can expect some improvement in the second

half of 2001. But communications is still in sick bay. Over-investment will take

a year to wear off."

Barrett said that traditionally telecom companies have spent about 17 per

cent of revenues on new equipment, but last year that jumped to 35 per cent.

"It was unprecedented and unsustainable. It will be the end of 2002 before

the sector starts to grow again."