The Stalwart

Intel Lying About Marketshare Losses?

Last week we noted that Intel's CFO Andy Bryant was quoted as saying they only lost 1% of market share to AMD in this quarter.

Well, in reading through the AMD conference call at Seeking Alpha we noticed that their management saw things differently:

Q - Michael Masdea

Yes, thanks a lot. I’ve just done the math; I’m trying to get a handle on how much market share you put in the quarter. Any estimates from your end? It looks like it’s a lot more than your competitor might have thought?

A - Hector Ruiz

Well, we have the numbers.  A year ago, we had 9.6%; a quarter ago, we had 11.9%, and it looks like we had 15.3%.

If those numbers are true, then they're huge q/q gains, clearly more than Intel is letting on.

China Threatens The Chips

Ed Sperling of Electronic News reports on a Morgan Stanley analyst's breathless speech to leaders of the semiconductor industry.  The analyst, Byron Wien told the industry they were on the verge of crisis because of a)The government not doing enough to help them b)China, and c) Companies hoarding too much cash.

“We’re at the beginning of a very serious challenge,” Wien said. “Unless we take action, we’re in trouble.”

He said the U.S. government needs to provide incentives to the industry, as well as dollars for research and education, because China cannot be counted upon to just continue buying bonds and stocks. He said at some point it will begin buying companies, as well.

Wien also assailed some of the leadership of technology companies, as well. He said the cash buildup by companies and the reduction of debt shows a lack of understanding about what to do with money and makes many companies ripe for a leveraged buyout. “What this says to me is that companies don’t know what to do with the money.”

First of all, you've got to be wary of any analyst who thinks that they understand the business better than industry-leaders.  Analysts don't like cash buildups, it's as simple as that.  Furthermore, his suggestion that the U.S. Government spend more money on R&D to ward of The China Threat is a joke.  Where is the government going to get this money?  Borrowings from China.

This last point is by far the strangest, however:

Wiens added that China will not be a bubble like Japan. The country has not made scurrilous purchases such as buying Rockefeller center. “The smartest people in China go into government,” he said. “I don’t think we can say the same.”

Thank God!

Barron's on AMD

The semiconductor industry is known for some great rivalries:  Nvidia Vs. ATI, QualComm Vs. Texas Instruments and of course the big one, Intel Vs. AMD.  For several years now, the perennial also-ran, AMD, has been steadily gaining on Intel, penetrating deeper into their markets, and going toe-to-toe with them on performance.  After a strong run in the companies shares, Rhonda Brammer of Barron's argues that now is not the time to sell your AMD.  Here are some of her main points:

• The spinoff of Spansion, their money losing memory division, will go ahead as planned eliminating a major drag for the company.  (Though I'm still confused how they're gonna spinoff such a turkey of a business).
• They are out-innovating Intel, as their sever chip Opteron was clearly better than Intel's Itanium.
• AMD's market-share has been growing rapidly, but is still very small...accounting for just 8% of the server market, up from 4.8% last year.  Internal projects suggest they could hit between 20% and 30% of this market by next year. 

As for valuation, she makes an elegant case:

Fine and dandy -- but the bottom line, of course, is, well, the bottom line. Analysts' earnings estimates for next year are all over the lot, ranging from 35 cents a share to $1.23 a share. Much depends on what happens to flash prices, and if, and when, the spinoff gets done and on what terms.

But strip out flash, do some back-of-the-envelope calculations, and it's no huge stretch -- even assuming growth rates way below those of the second quarter -- to see microprocessors alone, which last year (after interest expense and taxes) earned about 55 cents a share, netting about 85 cents this year and in 2006, even with beefed-up depreciation charges, around $1.15-$1.20.

Or look at it this way. The stock market says Intel is worth $151 billion and AMD, less than $9 billion. Which makes no sense. After all, AMD has one-seventh of Intel's sales and the better growth prospects. If AMD had even one-seventh of Intel's stock-market value, it'd be a $53 stock.

(Fred) Hickey, who has a paired trade -- long AMD, short Intel -- insists, in his usual understated fashion, AMD "could be the investment of a lifetime.

It certainly seems worthy of consideration.

Intel Down: Didn't Suprise On Guidance

Commentary on Intel's (NSDQ:INTC) recent disappointment..

Intel's predictions were pretty much in line -- which was enough to disappoint investors, judging by the drop in its share price after the close. ... Intel ... sank 3 percent.

Analysts said this is the first time in some time that Intel did not raise its guidance at the mid-point of the quarter, which may have disappointed investors and probably accounts for the drop in its stock.

So it seems investors were surprised by a break in Intel's previously consistent surprise trend...

P.S. we'll steal a quote from the comedian Lewis Black: "If it weren't for my horse, I'd never have spent that year in college... Don't think about that for more than two seconds, or you'll have an aneurysm and your head will explode."

Don't Listen To the Analysts #398473

We see stories like this from time to time.  Semiconductor analysts are telling the companies they follow to stop hording all their cash and to start giving it back to shareholders.  We reported on a similar story a few weeks ago.  Here's the latest:

“We think it’s time for semiconductor companies to stop asking investors to admire the enormous cash balances being accumulated and start focusing on maximizing shareholder value,” said Joe Osha, VP and semiconductor analyst at Merrill Lynch.

Osha said that semiconductor companies have been buying back their own shares “at a tremendous rate during the last three years,” but added that company executives have been complaining about the level of their stock prices.

“Perhaps if investors were given a greater share of the swelling cash hoards on the balance sheets of semiconductor companies that would change,” said Osha.

Recently, U.K. firm Future Horizons pointed out that semiconductor companies were not spending substantially on new product development.

“There’s a risk-averse nature to the industry. Companies should be investing more in R&D. Developing more new products,” said Future Horizons CEO Malcolm Penn, characterizing industry CEOs as “timid and risk-averse.”

So Osha says they should be giving their money away in the form of dividends, and the other guy wants to see more R&D.  Who to listen to?  Osha's complaint seems particularly odd.  If chip bosses think their companies' stock is a good deal, then buying up shares is a fine use of money, and certainly can help bring value to shareholders, despite what Mark Cuban thinks.

As for the call for more R&D, I'm skeptical.  I suspect that if there were some exciting new markets and technologies on the horizon, the companies would be preparing for them.  As it is, they're probably holding their cash, wisely, for another day.

Company execs, like individual investors, would be wise avoiding the advice of these analysts.

Measuring Semiconductor Growth

It should be an obvious point, though it bears reminder, growth measurements in the semiconductor industry depend heavily on currency:

It is important to note that the SIA (Semiconductor Industry Association) and WSTS (World Semiconductor Trade Statistics) both report revenue figures in US dollars, which has been historically appropriate given the fact that the US was clearly the dominant consumer of semiconductors. However, given that the Asia Pacific region now consumes close to half of all semiconductors, we are facing a measurement conundrum.

How one views the market will more than ever depend upon which currency one chooses. In 2004, semiconductor growth was 28% in US dollar terms, but only 17% in terms of the Euro. Looking back a little further, semiconductor ASPs (average selling prices) in the US dollar terms were almost 20% higher in June of 2005 than they were in January 2003. ASPs as measured with the Euro or Korean Won showed a less than 5% increase during the same period.

The most striking view comes when the market is closer to parity as compared with the previous year, such as it is this year. As stated earlier, the market is close to 7% growth this year in dollar terms. When viewing the market in Korean Won terms, it is DOWN over 5%. That is quite a substantial variance.

The currency dynamic has, in fact, become more than just an intellectual puzzle on how to view or forecast the market, it begins to cause real world pain and change the very structure of the market. Let’s look at DRAM for example.

Revenues in the DRAM industry are up 3% year-to-date in US Dollar terms, but down 10% in Korean Won terms. With the 23% growth in DRAM units this year, DRAM ASPs have dropped 16% in US Dollar terms and 27% drop when it comes to Korean Won terms. A gap of 11-percentage points in revenues can have a massive impact on the margin outlook for any given company. In this case, we could be looking at Samsung and Micron.

Again, it's an obvious point, but one that could easily be forgotten while making a semiconductor investment.  Here's my question:  At what point do semiconductor prices start having an effect on the currencies of countries like Taiwan and South Korea?  If a glut of inventory causes a price drop in chips, would that cause investors to park their currency elsewhere?  By virtue of the weakening in a company like Samsung, amidst a chip price war, I imagine this effect exists somewhat already.

No Slowdown Yet

Chip sales forecast: $226 bln in 2005, $246 bln in 2006, $273 bln in 2007, $309 bln in 2008

Gartner's Outlook For Semiconductors

In its latest study, Gartner says that after 64 per cent growth in 2004, worldwide chip capital equipment sales are projected to decline 11.6 per cent in 2005, and a further 6.5 per cent in 2006 before recovering in 2007 and 2008...

See this and more about semiconductors here.

Infineon's Fiscal Q3 Outlook

Revenues 1606 EURm over 1816 EURm last quarter, earnings go negative. Fiscal Q3 outlook:

Infineon anticipates no major improvement in demand in the third quarter of financial year 2005. The company expects continued pricing pressure, especially for chip-card ICs, memory, and mobile phone products. However, growth in shipments, primarily in Memory Products, should partially offset the impact of pricing pressure on revenues and operating results...

"As there are no near-term catalysts for growth in demand, especially in the memory and mobile phone businesses, in the third quarter we will continue to focus on cost-cutting measures and on restructuring non-profitable businesses,"

Outwardly Bullish Analyst Needs to Come out of the Closet and Confront Himself

Texas Instruments held its first-quarter conference call. A participating dead fish [analyst] did his species proud when he piped in: "Speaking for the bullish analysts, thanks for throwing us a life preserver."

Not the most reassuring of bulls, this analyst seems to lack conviction. Here. There's also some good criticism of Intel's latest earnings.