Intel Corp (INTC)

[DewDiligence]

Forbes on the semiconductor nuclear winter/spring:

[Sounds like the nuclear winter has ended but spring has not exactly started. Sort of like “mud season” –Dew]

http://www.forbes.com/2003/01/02/cx_ah_0102chips_print.html

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If you think of 2001 as the year of the chip industry's worst hangover ever, then 2002 will go down as the year the aspirin finally kicked in. For its part, the coming year looks like it'll be the one during which recovery will finally become apparent.

The worst part about curing a hangover is simply waiting for it to end--a feeling with which chip company investors and executives are familiar. The persistent question has been when the recovery will start, and every tentative statistic has fueled cause for hope.

At least the freefall is over. After global sales contracted by nearly one-third in 2001, market research firm iSuppli of El Segundo, Calif., says the chip industry will finish 2002 with a scant 1.5% sales growth. It isn't much, but we'll take it.

"People have been using the word 'recovery' all year," says iSuppli analyst Dale Ford. "My favorite word this year has been stabilization." Selling prices have stopped falling like a skydiver waiting to open his parachute. And in the final quarters of the year, revenue started to show modest growth.

What's more, growth should get healthier next year. Ford says he's forecasting 11.8% sales growth for 2003 across the chip industry. Yet even with that growth, sales will be below the overheated levels of 2000.

Even with the market down, four chip companies showed an average sales growth in 2002 of 30%--and all are poised to continue to ride that momentum into 2003. They are graphics chipmaker Nvidia, wireless chip concern Qualcomm and memory chipmakers Micron Technology and Infineon.

Nvidia has been riding the success of its PC graphics chips among the hard-core gaming market. It also scored a design win with Microsoft's Xbox, which has been a more muted success. It has a new heavy-duty graphics chip, the GeForce FX, due in early 2003.

In the graphics chip business Nvidia has done something unusual: It remained the king of the technological hill for two generations. "Usually one company is on top for awhile until a new company comes with new technology and takes the perch for itself. Nvidia has managed to stay on top," Ford says. Sales of its PC graphics chipsets coupled with sales of Microsoft's Xbox videogame system, which contains an Nvidia graphics chip, spurred it to realize sales growth of nearly 40%.

Memory chipmakers Micron and Infineon are likely to see sales tick up this year as the corporate IT market starts to hum back to life. After years of putting off their upgrades, businesses will likely start facing up to the fact that they need to upgrade at least some of their PCs. "We see the corporate IT upgrade cycle kicking in again," Ford says.

Renewed PC buying will also give some help to Intel and Advanced Micro Devices, though the price wars those two have fought against each other over the last year will limit the positive effect on their bottom lines. AMD in particular is having a hard time weathering the downturn, and in the last year has ceded back much of the market share it took from Intel in the previous two years.

The other bright spot is likely to be wireless gear. Investors have been bellyaching about the downturn in wireless phone sales. Ford says improvements in that market are underway--good news for Qualcomm, which has seen its sales pick up by nearly 33% from a year ago as shipments of phones that use its CDMA 2000 1X technology pick up.

"I think there's some health coming back to the wireless phone business," he says. "We'll finish this year with about 390 million phones sold, and I don't think it's unrealistic that we can reach 475 million next year."

But the long-term growth trends in the chip industry are changed for good, Ford says. Despite its vicious cycles, the industry has over the years turned in compound annual sales growth in the range of 15% to 17% depending on which periods of the industry's history you count. Ford says those days are over.

"We see that long-term growth falling to between 8% to 10%," he says. "The industry isn't going back to the same levels it has been used to."
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