Booming chip market sets of stock-buying frenzie

Leapday 2000 was a good day to own semiconductor stocks, most of which literally leaped ahead on Wall Street. Reports that worldwide semiconductor sales may grow much faster than previously projected during 2000 and next year sent investors scrambling to buy shares of many semiconductor and chip manufacturing tool companies.

Chip sales may jump 25 per cent and as much as 40 per cent next year according to market researchers from Dataquest and other firms who presented their forecast at the European International Strategy Symposium (ISS). "We are about to enter the golden age of the semiconductor industry," said Stanley Myers, president of Semiconductor Equipment and Materials International (SEMI), sponsor of ISS.

In the US the reports sent stock soaring on Tuesday. Equipment maker Lam Research climbed a whopping $18.10 to $156 per share. Less than two years ago, Lam’s stock traded for around $13 a share. DRAM maker Micron Technology saw its shares zoom up $21-1/16 to $99-1/8. And, Rambus, whose DRAM technology is being adopted by chip makers around the world, saw its stock jumped $50 to $291 after it announced that Hyundai and Siemens’ spinoff Infineon Technologies will begin volume production of Rambus-based DRAM chips. They are joining Samsung, NEC and Toshiba who committed earlier.

"After a disappointing three-year downturn, we are at the beginning of a substantial semiconductor industry up-cycle. By any measure, few other areas possess the growth, upside potential, and profitability of the Internet IC area," said Deutsche Banc Alex. Brown analyst Erika Klauer in a research report. The optimism reflects expectations that the chip industry is quickly heading for major shortages of key components because most chipmakers did not invest adequately in new manufacturing capacity after the market collapsed in late 1995. And some major producers of DRAMs, such as Texas Instruments, have

left the DRAM market altogether. Now that demand for DRAM and other components is picking up, a capacity crunch is quickly developing. That means companies like Lam and Applied Materials will be having their hands full producing enough tools to equip new fabs and retool older facilities. Because it takes months to build the advanced multi-million chip-making tools, backlogs at Lam and other equipment makers will likely swell to record levels in the coming quarters.

A major factor in the development of an acute chip shortage problem is that for the first time, a second major consumer of advanced circuits is emerging, besides the PC industry, is emerging. This is the Internet appliance sector. "There is life outside of the PC," said Jean-Philippe Dauvin, group vice president and chief economist for STMicroelectronics, who said PC's are no longer the only driving force behind IC growth. "The industry is now propelled by new digital devices and the merging worlds of computing, personal digital assistants, and mobile phones."

According to Malcolm Penn, president and CEO of market research Future Horizons, the IC market will experience increasing unit demand as new products emerge and the compounded annual growth rate will grow at the historic rate of some 17% over the next ten years. He believes, however that if IC manufacturers over-invest in the next two years, a recession will start in 2002 followed by an upswing in 2004.

Clark Fuhs, a Dataquest vice president and director, predicts new 300mm fabs will be a key to the new upturn. The question for chip-manufacturers today is whether or not the price of chips and future demand justifies investing in 300mm technology. "The price level has to increase 8 to 15 per cent over the 6 to 12 months ahead to enable the wafer manufacturer to solve this problem," said Fuhs. For the time being, investments in new fabs is expected to go into over-drive. Submicron Technology of Thailand, for example, announced it is now expecting approval to start its $1.5 billion DRAM plant by early next year.

Construction of the facility started in 1996 and was halted in 1997 when the DRAM market had collapsed and Alphatec, a major partner in the project had over-stated its earnings by about $1.8 billion. Submicron plans to raise $800 million to $1 billion from companies like Siemens’ and other Western electronics giants in return for a share of the fab’s output.