Orange County chipmakers are starting 2001 with a hangover from a party that’s raged on for the past few years. But analysts say their future may not be as challenging as it seems from Wall Street, where their stocks have been hammered.
Shares of Irvine-based Broadcom Corp. started the year down 70% from their 2000 high, while those of Santa Ana-based Microsemi Corp. were off 40% from their recent peak. Newport Beach-based Conexant Systems Inc. stock was down a stomach-turning 90% from its high in 2000.
Behind the sell-offs is a sudden change in perception that chipmakers have a less glorious future ahead of them.
“Growth will be slower in 2001 than last year,” said Rich Wawrzyniak, an analyst with Semico Research Corp., a Phoenix-based market researcher.
Global chip sales are pegged to come in at $205 billion for 2000, a 37% increase from 1999. This year, they are expected to increase by 17% in 2001, according to Semico. While growth stands to moderate, Wawrzyniak said, the increase comes on a larger base and may not be felt across all segments of the semiconductor industry. “Our business looks very good for 2001,” said Dave Sonksen, executive vice president and chief financial officer at Microsemi.
Microsemi supplies chips for various markets, and a slowdown in a couple of sectors won’t necessarily impact its earnings this year, he said. The company serves the satellite, telecommunications, computer, aerospace, industrial and medical markets.
“Over the last few years, we have transformed the company to address new markets” such as telecom and fiber optics, Sonksen said.
And while Microsemi’s market value has eroded by $280 million from its high last year, it is expected to report a 37% growth in earnings for 2001. According to First Call Corp., analysts estimate the company to post a profit of $1.29 per share for the calendar year, vs. 94 cents in 2000.
“Our margins will be improving throughout the year,” Sonksen said.
Most of the industry’s slowdown in growth will be for chips used in computers, analysts say. Demand for chips used in cable modems and set-top boxes,where Broadcom has a dominant market share,should continue to grow at a fast pace, they say. And flash memory chips,which are sold by Irvine-based Toshiba America Electronic Components Inc. and used in wireless phones, digital cameras and other devices,also should keep pace this year.
“You have to separate the PC vs. what’s going in the telecom area,” said Semico analyst Bob Merritt.
Overall sales of flash memory are expected to increase from around $10 billion in 2000 to $13.5 billion in 2001, according to Semico.
While Broadcom has seen a big loss in market value, analysts aren’t backing away from profit estimates for the company this year. According to a consensus estimate from 19 analysts polled by First Call, Broadcom is expected to post earnings of $1.44 per share in 2001, a growth of 43% from 2000. Broadcom’s chips are used in cable set-top boxes, modems, networking gear and home networking products.
But analysts are less optimistic about Conexant, a maker of chips for networking gear and other markets. The company is expected to report earnings of 11 cents a share in calendar 2001, down from 54 cents in 2000. Last month, Conexant warned it plans to report a loss for the quarter ended Dec. 29 because of excess inventory. The company’s shares have fallen in 36 out of the past 60 trading sessions.
Still, Semico’s Merritt said that the decline in Conexant and other chip stocks is in part due to a lack of context on Wall Street.
“There has been a tremendous reaction in the stock market because of lack of understanding in what’s happening in the communication area,” he said.
Regardless, one thing is clear: shares of some chipmakers still are richly valued but are more reasonably priced than they were just a few months ago. Broadcom now trades at more than 70 times its 2000 consensus earnings estimate and 50 times its projection for 2001, down from 250 times earnings at the stock’s peak last year. n
