Semiconductors: Q2 Analysis

I received this note from an investment
bank at the end of the week:

“Semiconductors. This report focuses on developments at
buyers of integrated circuits in the PC, wireline communications and wireless
communications end markets. Additionally, we include the results of our survey
of semiconductor device manufacturers themselves. We surveyed a total of 44
major OEM, EMS and electronics distribution firms, as well as 41 large
semiconductor companies, in order to build our quarterly inventory database. We
believe the survey is comprehensive enough to catch any inventory swings of size
sufficient to affect the semiconductor business.

Inventories held by semiconductor device manufacturers were flat sequentially,
in both dollar and days of inventory terms. Inventory levels are high relative
to the trough levels reached at the beginning of 2003, but we believe we’re
unlikely to see 2003 levels again as a result of the increased level of supply
chain risk being borne by upstream component manufacturers.

It’s hard to find much to get excited about looking at the
Q2 data, but neither is the analysis especially negative. Device manufacturer
inventories have stopped going up, while downstream inventories appear to be at
reasonable levels relative to history. It continues to be difficult to see how
any component shortages might emerge in the second half, though. Device makers
have enough inventory in place to meet any demand upticks without difficulty.”

Now, it seems to me, “flat sequentially, in both dollar
and days of inventory terms” means even less than it seems. With 2Q DRAM units
prices down significantly, and NAND prices down some, flat dollar inventory
and/or dollars-to-days-of-(dollar-based)-inventory masks an increase in unit
inventory. In turn, why even bother to worry about supply chain inventory when,
“increased level of supply chain risk being borne by upstream component
manufacturers.” Unless there is more underlying data, this is a perfect
“finesse” for making it seem like it’s safe to hold SOX components even though
the data could simultaneously be argued as pointing to significant inventory
risk…