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Despite the unsettling declines in stocks such as Intel, the chip industry still faces a bright future, according to Manoj Nadkarni, founder and editor of ChipInvestor.com. He blames some of the trouble on competition from Advanced Micro Devices and argues that companies using AMD processors, such as Gateway and Compaq, are doing fine -- as is AMD itself.
In analyzing chip companies, Nadkarni looks at growth, valuation, and financial strength. To assess growth potential, he stresses the importance of serving markets in Internet infrastructure and wireless, and also the trend toward automation of production. He singles out Asyst Technologies as a favorite stock but says equipment companies as a group are undervalued at the moment.
Nadkarni's comments came in a chat presented Oct. 5 on America Online by Business Week Online, in response to questions from the audience and from Jack Dierdorff and Amey Stone of BW Online. Here are edited excerpts of the chat. A complete transcript of this chat is available from BW Online on AOL, keyword: BW Talk.
Q: Manoj, one stock in your area in particular really sent the market into an attack of the vapors -- Intel [INTC]. Do you think this tech scare will spread -- and last?
A: ...Certainly there is some nervousness in the market because of Intel's pre-announcement. But that's a company-related issue. Same with Apple [AAPL]. The chip industry as a whole is fine and healthy, and we do expect strong earnings from the majority of companies. It's a tech scare.... But we think that those fears are unfounded.
Q: You say that these are company-specific problems, but with Intel, Apple, and now Dell all suggesting weaker PC demand with their pre-announcements, why aren't you worried?
A: Well, there's a common theme to problems we're seeing with Intel, Apple, and Dell. That's that AMD [Advanced Micro Devices], with its Athlon processor, is gaining market share. So the companies that have products based on AMD processors (Gateway and Compaq) are doing just fine...
Q: Can TXN [Texas Instruments] break away from the disfavor chips seem to be stuck in?
A: In the short run, that won't happen. However, the fundamentals for growth in the DSP [digital signal processing] and analog segments are very good. And the company has a good focus.
Q: Is RFMD a good chip stock to buy now?
A: RF Micro Devices makes chips for the wireless market, mainly for cell phones. Near-term, there is some turbulence in the market, but they are benefiting, as are all of the gallium-arsenide companies. We aren't advising on which stocks to buy, as much as analyzing their basic business.
Q: In your analysis of companies' "basic business," Manoj, what companies look best in this time of great nervousness?
A: You have to look at three things: A specific company's growth prospects. Then, look at valuation ratios. And then, look at the financial strength. For growth, there are different trends happening in the industry. One is migration toward more advanced geometries. Second, companies benefiting from Internet infrastructure growth. And then, within equipment companies we're seeing some trends toward more automation.
One of the companies that will benefit from these trends is Asyst Technologies [ASYT]. That company makes SMIF mini-environments and other automation products, and as chip manufacturing eventually migrates to 300-mm wafers, companies like Asyst will grow faster than any other chip-manufacturing company.... We also think that equipment companies as a whole are undervalued now.
Q: This is a natural question this week -- is the technology boom over?
A: No. Not at all. We think that we're in a long up-cycle for chip companies, specifically. And that's because chip companies provide the engine for Internet infrastructure and wireless applications. Those are the two key drivers.
Q: Your opinion on Vitesse Semiconductor [VTSS]? Also, your opinion on communications chips?
A: Vitesse is one of the best-run gallium-arsenide companies, but because they don't meet our valuation ratios, we don't dig more into them. On communications chips companies, such as PMC Sierra [PMCS] and Broadcom [BRCM], these companies are in one of the hottest segments growth-wise today. But their valuations are sky-high.
Q: Do you like the fundamentals of the chip segment produced by Atmel [ATML]?
A: We have looked at this company before, and like others, it's benefiting from growth in flash memories and microcontrollers. Also, the company has improved its financial ratios.
Q: Your thoughts on TQNT [TriQuint Semiconductor], please.
A: TriQuint is benefiting from growth in wireless and in broadband applications. We covered this company for some time, and it's one of the best revenue-growth companies...the growth fundamentals are solid. One other advantage a company like TriQuint has is that barriers to entry are higher because they make chips with gallium arsenide.
Q: What about Micron Technology [MU].
A: Well, Micron Technology announced outstanding results for the latest quarter yesterday. Nobody understands the DRAM business better than Micron. We think that the DRAM pricing environment is stable. There are normal, gradual declines to be expected. Micron is increasing wafer starts by about 10%. And for fiscal year 2001, it plans about $2.3 billion in capital expenditures. So, in short, we feel that the company is doing well.
Q: Manoj, signs are growing that the economy is slowing down. How vulnerable are chip stocks in a slowing economy?
A: Chip companies have their own dynamics. And that business dynamic is so strong that unless there's a major, major setback to the economy, chip companies will do well -- because of Internet growth especially.
Q: How about the future for flash memory chips?
A: There's an increasing amount of flash memory being used in cell phones. The present generation has 2 or 4 megabytes. The next will have 8. So the amount of flash memory is increasing, and that's a very favorable trend. Not only the number of users goes up but also density per phone increases. In addition, flash memory has applications in digital cameras, MP3 players, Palm Pilots -- so this is one area where there could be demand because of new applications we don't yet know. Needless to say, all flash-memory producers are doing very well.
Q: How do you feel about National Semiconductor [NSM]?
A: National Semiconductor is a leading analog and mixed-signal company. It got rid of its microprocessor business, which was a good move. As a result, the company's profitability has increased, and their valuation ratios look good.
Q: Summing up, Manoj, what strategy would you advise for the rest of the year?
A: While we like to look at individual companies' growth fundamentals, if you like a company, then you hold onto it, and the market volatility can present you with opportunities to accumulate on weakness.
Q: Let's hope there aren't too many of those opportunities! In general, do you operate on a long time horizon?
A: Yes. Absolutely. Our investing philosophy works well for long-term investors, not for a day-trader.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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