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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | JANUARY 8, 2002 INVESTING Q&A A Relative Recovery for Chip Stocks Windows XP is helping to boost demand, but overall tech spending has to pick up a lot more for a genuine rebound to occur
Nadkarni also expects the recession to end in 2002, and he thinks corporate spending on information technology could revive sooner than the general economy. He made these and other comments in a chat presented Jan. 3 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Edited excerpts follow. A complete transcript of this chat is available from BusinessWeek Online on AOL, keyword: BW Talk. To begin, Nadkarni presented this disclaimer: Different company examples in this chat are for the purpose of illustrating ideas. They are not an endorsement by Mr. Nadkarni or by chipinvestor.com, nor a recommendation or offer to buy or sell securities. Any action taken by you, as a result of the discussion here, is strictly at your own risk. Mr. Nadkarni or chipinvestor.com should not be liable for any gains or losses resulting from such actions. You should be aware that Mr. Nadkarni has positions in some of the stocks discussed. Q: Manoj, the stock market has given us good news the last couple of days, especially the chip stocks. Do you expect this to continue? A: Well, certainly the new year has started with a bang. We are seeing a lot of institutional money coming into tech stocks. The momentum of this market depends on the fourth-quarter results, which should come out in a few weeks. Q: There is news that chip prices are bouncing back. Do you see higher prices? And in which areas, specifically? A: The main reason for the DRAM price rise, we believe, is Windows XP. With the XP launch in October, the DRAM content for the PC has almost doubled. Intel's chip set supporting inexpensive DRAMs for Pentium 4 also helps increase demand. Q: Is Advanced Micro Devices (AMD ) a good investment? A: Well, AMD has certainly done well in the past two years, gaining market share with its Athlon processors. The Windows XP release is certainly boosting PC demand. AMD has been strong in execution and in marketing.... The major concern for AMD is strong price competition from Intel (INTC ). And we believe that AMD's future depends on implementing 0.13-micron, next-generation processors successfully, and in a timely manner. Q: Speaking of Intel (INTC ), what do you think of it? A: Three factors are helping Intel: No. 1, the Windows XP launch. Second, Intel and its licensees have released chip sets enabling use of inexpensive SDRAMs for the Pentium 4. The third factor is the seasonal uptick that the company usually sees for the holidays. In addition, Intel has good offerings and a performance lead in the mobile sector. Again, the negative for Intel is certainly the price competition from AMD. We have been neutral on Intel for the past year. Q: Can LSI Logic (LSI ) return to strong profits, and from what products? A: LSI is doing well in the consumer segment, and it looks as if the storage business has bottomed out. However, it is still dependent on communications chips. Also, as LSI's revenues dropped over the past year, there was no improvement in operating expenses. And that's partly because midsize companies with their own plants, like LSI, find it difficult to get manufacturing economies of scale. For them to return to profitability, they certainly need to improve operating expenses. Q: Do you think Nvidia (NVDA ) is too expensive now? A: Nvidia is certainly pricey. But it's also one of the very few chip companies to do well in 2001. The company has executed very well in bringing advanced graphics chips to market quickly. It's benefiting from PC-unit shipment growth, and also from Xbox [Microsoft's game console]. Q: What are your own favorite stock picks for chips now? A: Companies producing PC-related chips and those serving the consumer sector are beginning to do well. Also, other things being equal, we like fab-less companies that do not have expensive [fabrication] plants to maintain during the slowdown. Their break-even levels are normally lower. We already talked about Nvidia, but there are some lesser-known names with PC-sector exposure, too. Q: Such as? A: One such company is Pericom Semiconductor (PSEM ). It makes interface chips for notebooks and servers, and the notebook sales have been strong. Now, this company has been a long-time chipinvestor.com favorite, and I have a position in this stock. We think that Pericom has some near-term challenges, as its networking business hasn't recovered. But its valuations are good, and the company has sizable [quantities of] cash. Q: RF Micro Devices (RFMD ) is a company several in the audience want your views on. A: Well, RFMD has been doing well as the wireless handset market has bounced back. Its No. 1 customer, Nokia (NOK ), is seeing good growth. RF Micro recently opened a new wafer facility, which will affect its short-term margins. Also, if you are considering RF Micro, keep in mind that its competition, Alpha (AHAA ), is merging with Conexant's (CNXT ) wireless business. Q: What is your opinion on TriQuint Semiconductor (TQNT )? A: We've covered TriQuint previously, but at present we don't. TriQuint is a leading maker of gallium arsenide circuits, and it has the broadest portfolio encompassing a wide frequency range. The company lowered guidance in December, and it may have lost a customer or two. Also the CEO, Steve Sharp, who has done a superb job for the past several years, is retiring this year. Q: Besides the couple of stocks you named earlier, what other chip names meet your criteria? A: Another of our favorites has been Keithley Instruments (KEI ). For Keithley, the near-term outlook isn't great, as is the case for most equipment companies. But during the up cycle, it has had good operating margins. Also, we have been bullish on Ikos (IKOS ), and I have positions in these two stocks. Q: Your opinion on Vitesse Semiconductor (VTSS )? A: Vitesse serves the communications infrastructure market. Companies like Vitesse and PMC-Sierra (PMCS ) saw a more severe drop in revenues during the down cycle than other chipmakers. We feel that the valuations are still high. One of the areas it is delving into, network processors, is a market that will be competitive, and we expect a shakeout similar to what we saw in the graphics chip business. Q: For tech stocks, including chips, to revive strongly, businesses must resume capital spending. How soon do you see that happening? A: We are no experts in macroeconomics, but with interest rates at a 40-year low, we think that the recession will end in 2002. For some businesses, IT spending could resume sooner, as companies upgrade to Windows XP-based systems. Capital investments in new semiconductor plants are unlikely to increase until capacity utilization rates go up. Q: Are your recommendations intended for long-term investors? What's the time frame? A: Our investing approach works well for long-term investors. For us, buying a stock is like buying a business. So the philosophy is to seek companies with good growth potential at fair, or attractive, valuations and with sound financials. Edited by Jack Dierdorff Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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