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Happy Days For The Semi-Equipment Space
In the semiconductor space, if you want to play you have to pay. It takes a lot of expensive equipment to make the chips that go into your iPod, Blackberry, and Xbox, and even if companies like Intel (NYSE:INTC) and Taiwan Semiconductor (NYSE:TSM) opt to rein in spending during tough times, sooner or later they always come back for more.
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With corporations peaking out of their bunkers like nervous gophers and opening up the spending taps again for computers, servers and the like, chip companies have seen a surge in demand over the past year. As ASML (Nasdaq:ASML) and Novellus (Nasdaq:NVLS) showed us this week, that is translating into strong order flow and revenue for the companies that build the boxes that make the chips.
The Quarters that Were
Although ASML and Novellus are certainly very different companies, the results for the June quarter were similar on a relative basis. ASML saw 44% sequential revenue growth; NVLS saw 16%. Both companies showed solid improvement in gross margins, and operating profits rose solidly on a sequential and reversed year-ago losses. Likewise, both companies exceeded the Wall Street consens-a-guess.
The Looks Ahead
Interestingly, both companies also issued guidance pointing to order growth for the third quarter ranging in the mid-single digits up to maybe 10%. In both cases, neither ASML nor Novellus are yet facing their peak order rates, and that suggests that there could be further growth ahead for the sector. Moreover, that fits the story we have been hearing of late from Applied Materials (Nasdaq:AMAT), the unquestioned giant in the space, as well as customers like the aforementioned Intel and Taiwan Semi.
Is There Still Room on this Ride?
If you look at the charts for these two stocks, you see a strong rebound from the 2008/2009 lows. While it is true that tech stocks in generally have enjoyed a pop, that is part and parcel of a chip sector rebound. One of the oddities of this space is that the semiconductor sector often peaks just as the economy is getting better and then stalls out. Investors who fail to appreciate this phenomenon and buy in too late risk showing up for the party just as its winding down (and then get stuck with the bill).
Of course, you can argue that demand for electronics from Apple, Research In Motion (Nasdaq:RIMM), Dell (Nasdaq:DELL) and so on will keep stoking the growth engine and allow the industry to break out of its former pattern. Unfortunately, that sounds suspiciously like "it's different this time" to me, and that is a phrase that almost always sends grizzled investors fleeing to the hills. So while I fully grant that the sector has not yet reached its prior peak, and this peak could conceivably end at a higher point than prior ones, the reality is that I think we are already well into this rally and the easy money is off the table. (For related reading, see Look To Semiconductors For Earnings Growth.)
The Bottom Line
Neither ASML nor Novellus are bad companies. In fact, ASML continues to be a leader in a critical step of the manufacturing process and often captures as much as 20% of cycle spending. Likewise, Novellus is one of the leaders (if not the leader) in the movement toward copper and low-k dielectrics. There is a difference, though, between good companies and good stocks. Although I think there is still money to be made from this cyclical upswing, I would tread carefully and spread my picks around other non-chip names as well.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
With corporations peaking out of their bunkers like nervous gophers and opening up the spending taps again for computers, servers and the like, chip companies have seen a surge in demand over the past year. As ASML (Nasdaq:ASML) and Novellus (Nasdaq:NVLS) showed us this week, that is translating into strong order flow and revenue for the companies that build the boxes that make the chips.
The Quarters that Were
Although ASML and Novellus are certainly very different companies, the results for the June quarter were similar on a relative basis. ASML saw 44% sequential revenue growth; NVLS saw 16%. Both companies showed solid improvement in gross margins, and operating profits rose solidly on a sequential and reversed year-ago losses. Likewise, both companies exceeded the Wall Street consens-a-guess.
The Looks Ahead
Interestingly, both companies also issued guidance pointing to order growth for the third quarter ranging in the mid-single digits up to maybe 10%. In both cases, neither ASML nor Novellus are yet facing their peak order rates, and that suggests that there could be further growth ahead for the sector. Moreover, that fits the story we have been hearing of late from Applied Materials (Nasdaq:AMAT), the unquestioned giant in the space, as well as customers like the aforementioned Intel and Taiwan Semi.
If you look at the charts for these two stocks, you see a strong rebound from the 2008/2009 lows. While it is true that tech stocks in generally have enjoyed a pop, that is part and parcel of a chip sector rebound. One of the oddities of this space is that the semiconductor sector often peaks just as the economy is getting better and then stalls out. Investors who fail to appreciate this phenomenon and buy in too late risk showing up for the party just as its winding down (and then get stuck with the bill).
Of course, you can argue that demand for electronics from Apple, Research In Motion (Nasdaq:RIMM), Dell (Nasdaq:DELL) and so on will keep stoking the growth engine and allow the industry to break out of its former pattern. Unfortunately, that sounds suspiciously like "it's different this time" to me, and that is a phrase that almost always sends grizzled investors fleeing to the hills. So while I fully grant that the sector has not yet reached its prior peak, and this peak could conceivably end at a higher point than prior ones, the reality is that I think we are already well into this rally and the easy money is off the table. (For related reading, see Look To Semiconductors For Earnings Growth.)
The Bottom Line
Neither ASML nor Novellus are bad companies. In fact, ASML continues to be a leader in a critical step of the manufacturing process and often captures as much as 20% of cycle spending. Likewise, Novellus is one of the leaders (if not the leader) in the movement toward copper and low-k dielectrics. There is a difference, though, between good companies and good stocks. Although I think there is still money to be made from this cyclical upswing, I would tread carefully and spread my picks around other non-chip names as well.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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