One Gauge of a Recovery in Technology:
the Semiconductor Industry
The semiconductor industry is often the first sector to lead the technology
market downward, and it is also often the first to lead the rest of the market
upward in a recovery. That’s because semiconductors—the “chips”
of silicon used in electronic circuitry--are the basic building blocks of electronic
products and systems, such as computers and telecommunications. Demand or lack
of demand for chips is one of the first signs of a pickup or slowdown in demand
for technology end products.
What Signals an Improved Semiconductor Market?
We want to recognize the signals of a rebound in the economy
and in the stock market early enough to make profitable investments. The bottom
in the chip cycle could be the optimal entry point for investing in the technology
sector. What would identify this bottoming?
- Improving Book-to-Bill ratio: The Semiconductor Industry Association
(SIA) publishes the book-to-bill ratio report monthly. It measures demand
for chips. A ratio of more than 1.00 implies increased demand.
- Reduced inventories at firms ordering chips: Look for comments in reports
from semiconductor companies that customers are demanding immediate delivery,
or that order times have shortened, i.e. that they are burning through their
inventory.
- More demand for personal computers (PCs): This kind of announcement could
come from the PC makers, such as Microsoft, Dell, Gateway, or from the companies
that make the microprocessors for PCs, such as Intel or Advanced Micro Devices.
- More demand for communication devices: Cell phones, hand-held computers,
cable modems, DSL, and other communication devices require communication
chips, wireless chips, or memory chips, such as DRAM and flash. This news
could come from the device companies, such as Nokia, Palm or Scientific
Atlanta, or from the chip makers, such as Motorola, Micron Technology, or
Advanced Micro Devices.
- Positive forecasts from the SIA: In their annual mid-year forecast on
June 4 and 5, 2002, the SIA forecast a total worldwide semiconductor growth
of 3.1% for 2002 over 2001, but for The Americas –3.5% year-over-year.
(2001 was –32% from 2000 worldwide and –44.2% for The Americas.)*
Conclusion:
Although investors usually want to be invested before the recovery,
if they wait until they see a pickup in orders for semiconductors, they will
likely be getting in during the first stage of the recovery. If the SIA forecasts
turn out to be accurate, 2001 was the bottom for semiconductors worldwide, and
in The Americas the bottom will be sometime this year, as growth is anticipated
at 24.1% for 2003 year-over-year.
Linda Stewart www.fizone.com
June 18,2002
*Forecasts
are from firms around the world participating in the World Semiconductor Trade
Statistics (WSTS) program.
