My Favorite Stock Plays…
I have my suspicions about channel stuffing
by some of the larger technology vendors; which doesn’t come as a surprise
considering the excess inventory downstream in semiconductor components. This
column has discussed semiconductor inventory levels in
this article and
this article. Notice that
after all the vendors made the top-line numbers in recent quarters the
distribution partners all guided slightly lower for future quarter top-lines.
Incentives seem to be popular to stimulate sales. But this situation should be a
set-up for some OK long and short positions in the second / third calendar
quarters.
Channel stuffing is essentially a sarcastic term that can be used after the fact
when re-stocking of shelves occurs ahead of a slow-down in sell-through. I spoke
with 12 vendors last week and the general, collective takeaway was that they are
all doing what they can to push product through the channel. This would seem to
go hand-in-hand with the top-line guide-down that the IT distributors gave in
earlier weeks.
I recall (Intel CEO) Andy Bryant or Paul Otellini, or somebody in a similar
capacity, came out and denied Intel was channel stuffing. Since this answered a
question that nobody seemed to actually ask at the time, it seemed to me to be
an excellent signal Intel was / is, in fact, channel stuffing.
I imagine companies call it something else in order meet the letter of
disclosure laws but it seems to me that IC suppliers could not help but stuff
the channel when demand initially drops off. I don’t believe Intel, or anybody
else, has enough visibility to distinguish between re-filling from shipments and
over-stocking shelves at the moment end-product starts to sit un-sold in
inventory. There are too many stages in the pipeline, including millions of
retail shelves, to believe anybody can see “all” of them.
The nonsense earlier in the week about the efficiency of modern supply chains,
the end of the Semiconductor cycle and 16+ percent growth for as far as the eye
can see is just like Y2K. It will serve to give a few more suppliers cover for
cranking out parts. Just like stock “analysts,” if everybody is dong the same
thing, nobody will get singled out for being “wrong.”
Making it worse, the IC suppliers probably have a few weeks of deniability
during which they can claim they didn’t know there was a problem while cranking
out parts into somebody else’s inventory. Then they can “heroically” cut back in
order to “save” the ODMs, VARs, retailers, etc. from a glut.
The drop in DRAM prices, having held near $2.70 to $2.80 (even $2.60 to $2.65
late last week, down from around $4.00) since Chinese New Year would seem to put
a dent in the hoped-for second half recovery but nobody is talking about it in
the press.
I still think the best-case scenario is consumers keep spending and unit sales
stay up or only decline slightly. New capacity will cause ASPs, and profits, to
plummet. Like Kevin Bacon in Animal House, semiconductor companies will stand up
and claim, “All is well,” based on top-line performance. The same applies for
cell phones – in spades – since so much of it is self-contained in Asia, where
admitting to such an error might be considered losing face.
The key in semiconductors could be ASPs. It’s possible to debate what demand
will be like the last two weeks of March or in the second calendar quarter
(better, seasonal, or worse). But ASPs haven’t fallen off quite like they have
in many other cycles. I’ve spoken with a few semiconductor-related companies in
the last three weeks and not one company (semiconductor, semiconductor capital
equipment, assembly and test, etc.) could answer this question about ASPs. Or
maybe they “wouldn’t” answer, rather than “couldn’t” answer. Generally, ASPs
have dropped off one to two quarters after unit demand tapers off. If so, then
Wall Street’s current assumptions for margins being near peak levels for the
next two to three quarters are likely to come down. Time will tell.
ASPs may not have dropped off quite like in the past, but they have nonetheless
dropped off. Intel trashed NOR flash prices to grow / maintain volume. NAND
flash is off 40 percent from last Spring. TSMC wafer prices are down at least 20
percent since October. And AMD is selling Duron CPUs to Lenovo for less than $20
per unit.
The spot DRAM price drop is new, but significant. If it sticks, the major DRAM
manufacturers may have to drop at the next Tier-1 contract renewal
(approximately monthly). Companies like Dell will not sit still and take parts
at $4.00 when the spot is $2.60 for very long. Due to the recent supply
situation, contracts will be honored and so there will be some lag.
So, I suspect that not one company “would” answer, rather than “could” answer. I
continue to insist a company who “can’t” tell us where their ASP’s are needs new
management – gee, like somebody who can actually, like, prepare a sales
report…
We may soon see the return of the “visibility” game. Managers who only look for
good – as opposed to accurate – news, really can’t see when the news is bad?!
Maybe like the Freescale guy last week explaining it was impossible for a
business the size of semiconductors to grow at 16+ percent when GDP growth is 2
percent / 3 percent / 4 percent (even with the CPI under-reporting). So perhaps
in these circumstances, semi companies that meet the number more than two
quarters in a row are cooking the books?… QED. Someday the market will value
companies whose managers tell them bad news and good news.
That said, taking a look at SIA data, which reports industry wide ASPs, DRAM is
less than 20 percent of the overall unit mix. And DRAM prices have actually been
relatively strong, until the fall off over the past two months. Analog pricing
is much more reflective and a greater percentage of the overall unit mix and
ASPs have been fairly firm, except in commodity analog, which is usually a great
leading indicator. So, it looks like ASPs could be the next shoe to drop.
So what would I do, stock-wise? I think we get 10 percent sell off and the SOX
hits 380 sometime during the second calendar quarter. I would consider being a
buyer during the second quarter if / when the Street lowers numbers.
My favorite stock
plays at this point look like short XLNX and long ATHR (as separate positions;
not as a paired trade).
Xilinx’s inventories are moving downward but still very high versus
normalized levels. Even if they work to just under 150 days this quarter they
are still one to two months over ideal levels. Xilinx’s product cycle /
positioning is weak over next six months versus Altera. Altera’s parts are
designed into the new EMC box expected to be released in mid-Summer (sym7) and
XLNX design wins on the high-end will not ramp for another six to nine months.
There is only downside risk to Xilinx’s numbers: after management raised
guidance, there is a strong chance of downward revisions – especially on gross
margins, with inventory overhang and the Street being at near peak margin
assumptions. Finally, the stock is trading at higher end of historical multiple
range; so with likely downward earnings revisions that could set up a short.
I like Atheros Communications for all the reasons that most don’t seem to
focus on. Expanding TAM, embedded WLAN opportunity in printers, autos, digital
cameras, etc. Also, we will probably start to see a number of OEMs transition
desktop’s over to include WLAN on motherboards as well. Broadcom is a strong
competitor and I think both companies both can benefit significantly. It will be
interesting as well if the company announces some non WLAN product over the next
week or two with volume shipments by the third quarter – maybe in GPS.
Melanie Hollands