01-Oct-01 Fight Urge to Bottom Fish for Comm ICs [BRIEFING.COM - Robert J. Reid] They were once the darlings of the Nasdaq boom, but have fallen to earth as capital spending has slowed, inventories have climbed and operating losses are mounting. Briefing.com believes there are better places to look for bargains.
What Are They? Communications technology has evolved from simple analog voice signals transmitted over networks of copper telephone lines to complex analog and digital voice and data signals transmitted over hybrid networks of media, such as copper, coaxial and fiber optic cables, as well as by radio frequency. These stocks were the Nasdaq favorites 18 months ago as the emergence of new applications such as video conferencing and wireless web devices spurred demand for better chips that can handle the increased demand for wireless bandwidth. Well, demand for these products has not materialized.
The usual suspects are Applied Micro (AMCC 6.76), Broadcom (BRCM 18.77), Conexant (CNXT 7.51), Marvell (MRVL 13.00), Microtune (TUNE 10.21), PMC-Sierra (PMCS 9.87), TranSwitch (TXCC 2.96), Vitesse Semi (VTSS 7.42). Customers include leading communications equipment manufacturers such as Alcatel, Ciena, Cisco, Fujitsu, Hitachi, Huawei, JDS Uniphase, Juniper Networks, Lucent, Marconi Communications, NEC, Nortel, Sycamore Networks, ONI Systems, Tellabs and Tellium.
Telecom IC Stocks Most At Risk Among the comm IC universe, the companies with the greater exposure to the telecom carrier market are the ones we would least like to own. Prior to the attacks, they already were mired in the worst conditions. Also, September was the most critical month not only for these companies but also their customers. We expect some brutal earnings announcements and conference calls over the coming weeks to drive share prices lower. September remains a critical month not only for determining this quarter's revenue levels but also analysts rely on it for building backlog forecasts for the December quarter. It does not look pretty. The telecom-related stocks include AMCC, TXCC.
What's the Problem? Demand Should Remain Sluggish: First and foremost, a rebound in demand is not on the horizon. The customers for this sector are having tough times as reflected by the balance sheets. Cash is getting tight, debt levels are increasing and customers' credit facilities are getting strained. OEMs are issuing pre-announcements citing order push outs due to a sluggish macroeconomic environment. Overall, customers are going into a survival mode. Forget about adding capacity. Nobody wants it -- network utilization is below normal even with existing equipment. Customers are taking steps so that they will be viable in 2-3 years. Cash is being used to keep the engine running, not to buy a new CD player, so to speak.
Cap-ex Reductions: Even casual readers of Briefing.com are aware of the huge capital spending reductions, especially by the telecom carriers. To give you a sense of the carnage, Merrill Lynch forecasts that domestic wireline capital spending will decline 16% in 2001 and another 22% in 2002. This is after gains of +29% in 1999 and +41% in 2000.
Inventory Overhang: Most analysts are looking at Q2 for inventories to return to normal, with some even predicting it will happen by Q1. Based on the numerous conference calls and earnings reports, Briefing.com sees even Q2 as optimistic. Also, there is the possibility that OEMs and the EMS companies, fresh off getting burned with too high of inventories over the past 6-9 months, will be very selective and perhaps even end up with inventory shortages as a result of being too selective in ordering inventory.