Comms chips

Chips Start the Downslide

5:45 PM -- It's been apparent for some time that telecom semiconductors -- and possibly optical components as well -- are headed for a downward slide.

Analyst Ed Zabitsky of ACI Research has been railing about this for at least a couple of quarters. Part of his thesis is that China's expansion has been a government stimulus plan -- meaning the boom is finite. That seems to be playing out.

On a more basic level, he's been concerned that telecom chip suppliers seem to be doing better than their customers. Talk of shortages is pervasive, too, which usually leads to vendors ordering more chips than they need.

This happens in semiconductors periodically. The resulting tight demand causes customers to order a bit more than they really need, to guarantee supply. When it all stops -- when the supply catches up to the demand -- it stops hard. Systems vendors end up with excess inventory and no reason to order more components.

PMC said yesterday that its third-quarter earnings won't meet expectations. If Zabitsky is right, it's part of a coming wave of disappointing announcements.

"As we have detailed ad nauseum, the semiconductor inventory bubble has just begun to burst," Zabitsky writes in his PMC-Sierra Inc. (Nasdaq: PMCS) analysis published today. "While PC component demand has already begun to correct, telecom-related ICs are still experiencing tight capacity."

— Craig Matsumoto, West Coast Editor, Light Reading

ycurrent 12/5/2012 | 4:22:53 PM
re: Chips Start the Downslide

chips always have their own cyclicality. a way out would require a change in the secular growth rate.  As you point out, stimulus doesn't qualify... broadband investments for capacity boosts across core/metro/edge for video demand might.

paolo.franzoi 12/5/2012 | 4:22:53 PM
re: Chips Start the Downslide


At least in the old days, you used to be able to time the downturn is semiconductors (and the cooresponding upturns) by tracking Applied Materials.  Looks like this still might be true.



Pete Baldwin 12/5/2012 | 4:22:53 PM
re: Chips Start the Downslide

Remember 10 or 15 years ago, when the chip industry thought those cycles were dead? They were wrong, obviously.

It's really looking like the chip cycle is a plain fact of life. It's driven by game theory more than engineering.

For investors, I guess the trick is to not be the guy surprised by the cycles. (And once you've mastered that, you can advance to the semiconductor equipment sector, which IIRC has longer and harsher cycles. It's like the next level on the video game.)

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