A WARNING FROM THE CHIP SPACE?
Technology has been the darling of the recent stock market rally, however, there are some signs that the strength in tech could be getting ahead of itself. Semiconductors, notoriously sensitive to the business cycle, are beginning to show some warning signs. IHS reported last week that semiconductor suppliers have near record days of inventory (Via IHS Isuppli):
Global inventories held by semiconductor suppliers surged to their highest level in two-and-a-half years during the fourth quarter of 2010, a development that could spell trouble if chip industry growth loses steam this year, new IHS iSuppli research indicates.
Semiconductor suppliers had 83.6 days of inventory (DOI) at the end of the fourth quarter of 2010, up 5.5 days, or 7 percent, from 78.1 days in the previous quarter. Inventory was at its highest level since the second quarter of 2008—right before the onset of the last semiconductor downturn—when DOI reached 84 days.
“Inventory levels arguably now are high by any standard, illustrating the difficulty of controlling chip stockpiles even with semiconductor suppliers’ arduous efforts to keep them in check,” said Sharon Stiefel, analyst, semiconductor market intelligence, at IHS. “The sharp increase of semiconductor inventory during the fourth quarter defied expectations of a decline for the period. This inflated level of inventory could become a concern if semiconductor industry growth falls short of expectations in 2011.”
Source: IHS
Add to this Fred Hickey’s comments about the coming glut of chips due to the mad rush by all the PC majors into the tablet/smart phone space – which makes a lot of sense when you look at the slate of launches scheduled for the 2nd half 2011. Supply chains can become less efficient when companies react to competition (to get a foothold in a new market) rather than proactively planning product launches.
I’m readying for a pair trade – long the current underdog (Intel) and short the in-crowd (NVDA, ARMH, etc.)
The winds are blowing heavily against Intel at the moment. Intel has suffered some key losses with Nokia defecting from x86 friendly MeeGo and moving to Windows Phone 7, which is ARM only. Microsoft has demonstrated an ARM friendly build of its Windows operating system and Microsoft Office.
Additionally, Intel is threatened in the consumer space as computing performance requirements have stagnated and intel’s low power offering (Atom) is not competitive with ARM designs on power draw for the increasingly important tablet market, while ARM designs are making leaps and bounds in performance improvements.
Check out NVIDIA’s Tegra roadmap:
http://www.anandtech.com/show/4181/nvidias-project-kalel-quadcore-a9s-coming-to-smartphonestablets-this-year
NVIDIA designed ARM tablet performance faster in certain functions than Core2Duo this August is an astonishing level of advancement.
All that said, Intel has world class R&D and has repeatedly demonstrated in the past that they can not only recover but dominate from surprise attacks by competitors (AMD K6 versus Pentium II in the late 90s for example).
Totally agree with all your points. My trade is more related to fading the hype surrounding the NVDAs of the world (regardless of their ultimate long-term success) while taking a contrarian position in Intel. As you mentioned, Intel has the cash, R&D and supply chain muscle to undercut the competition with their Atom chip.
My bet is that the sentiment is negative enough toward Intel at the moment. With their 10x PE and potential to dominate the chip landscape at their will, the stock could outperform as risk is taken off the 25x PE stocks that could be facing inventory issues when the tablet makers market share results fall short of expectations.
I wouldn’t risk warm cow piss strained through a dirty sock on anything iSuppli says. They don’t have a clue. Their research is backwards looking, their estimates have been so far off as to be humorous, and their research is secondary, not primary. Effectively, this research isn’t worth the paper it is printed on.
Don’t risk a penny based on what they say.