As pundits debate whether the U.S. economy is in a recession, makers of semiconductor equipment have been living through one. "The chip equipment industry has boom and bust cycles—it's been in a recession for a year now and 2008 is not looking any better," says Angelo Zino, who follows the group for Standard & Poor's Equity Research.
Sales of semiconductor equipment are expected to drop this year, mainly because of weakness in memory chips, especially dynamic random access memory (DRAM), Zino says. "We think chipmakers will postpone capacity expansion plans until 2009," he says, given the recent excess supply of DRAM and the uncertain economic outlook.
Although many equipment makers' outlook for the next quarter or so is downbeat, investors are starting to look for a bottom. Zino sees supply/demand improvement in the second half of this year, leading to a new spending cycle in early 2009. In the meantime, some chip equipment makers that focus on growth areas, namely the flat panel display and solar panel markets, should get a boost in sales, he says.
BusinessWeek.com's Karyn McCormack recently spoke with Zino about the chip equipment industry and his favorite stocks. Edited excerpts of their conversation follow.
What's your forecast for spending on chip equipment this year? What's the reason for the drop?
We're looking for a sharp decline of 20% to 25% in semiconductor equipment sales this year. That's primarily driven by weakness in the memory segment, mainly DRAM, which we expect to fall by 40% to 50%. The main reason for that is an oversupply issue that's been hanging over the industry for the last year or so. Also, there's poor visibility because of the overall economic environment. Most chipmakers have started to push out orders—we're looking for orders to be pushed out into late 2008.
When do you see a recovery?
We think a recovery will start in the first half of 2009, after the supply/demand balance improves in the second half of 2008, which will help increase chip prices. In 2009, we look for a new spending cycle to begin for chipmakers.
The biggest risk to this scenario is if we see a similar oversupply situation in NAND flash memory to what is currently being witnessed in the DRAM environment. While we expect robust demand for NAND flash memory chips in the second half of 2008 to prevent this from occurring, we remain wary of greater than anticipated economic weakness.
Are there any companies still spending on equipment despite the tough times?
We expect big customers like Intel (INTC) and Samsung (which we expect will make up about one-third of semiconductor equipment sales this year) to continue to spend. These large companies want to gain a technological advantage so that when an upturn begins they are better positioned to take market share from competitors.
At the same time, the smaller chip companies are prone to postponing orders right now, and will wait until the economy recovers and work down existing inventories. They will wait until they see a considerable rise in demand before they start to order equipment again.