Analysts Worried About Slowdown in Chip Industry

SAN FRANCISCO – Concerns about a slowdown in the semiconductor industry intensified Friday as analysts greeted a report that industry sales rose slightly last month with renewed worries that revenue growth could slow in the months ahead.

May sales of semiconductors rose 2 percent from April, or 37 percent from depressed levels of May of last year, to their highest levels since December 2000, the Semiconductor Industry Association (search) reported. Some analysts viewed the report as a sign that industry momentum was weakening.

"We believe the best of the cycle has passed," Glen Yeung, an analyst with Citigroup Smith Barney (search), wrote in a note to clients.

Meanwhile, investors appeared to cut back expectations for Intel Corp. (INTC), the world's largest chip maker, which is scheduled to report quarterly earnings and give a third-quarter revenue forecast on July 13.

Intel shares fell more than 2 percent in mid-day trading. It was the second day of losses, after a Morgan Stanley analyst said Thursday Intel's revenue forecast could be at the low end of Wall Street estimates.

Semiconductor shares also fell broadly again Friday, with the Philadelphia Stock Exchange Semiconductor index (search) down 2.2 percent. For the week, chip stocks have fallen more than 4 percent.

The SIA, which represents U.S. semiconductor companies, said industry fundamentals remain positive and should support strong growth through the rest of 2004.

Analysts, however, saw signs that growth could be slowing, suggesting that the highly cyclical chip industry could be on its way toward a slump. Sales growth is expected to slow to 4 percent next year, with industry revenue declining nearly 1 percent in 2006.

Though memory and cellular phone chips were especially strong in the month, analysts said it appeared that industry sales growth could slow in the months ahead.

Yeung said sales of microprocessors, the central chip in personal computers, were relatively weak in May. Intel derives much of its revenue from the sale of microprocessors.

Microprocessor sales fell 5 percent from April. From a year earlier, sales grew 21 percent, but that was slower than the 25 percent year-over-year uptick in April, Yeung said.

Memory was the best performing segment in May, growing 73 percent year-over-year on higher prices.

Mark FitzGerald, an analyst with Banc of America Securities, said the data nonetheless "confirms a peak" in the industry cycle, which could cut the industry's plans to buy semiconductor production equipment from companies like Applied Materials Inc. and KLA-Tencor Corp.

"Declining momentum suggests that positive revenue and earnings revisions for semi-equipment stocks will drop off sharply this quarter," FitzGerald wrote in a note to clients.