Today's Semiconductor Slump Will end in late 2009

Implications: The semiconductor industry is undergoing a very predictable down cycle based upon excessive capital spending in 2006.  As it always does, demand will catch up to this spending in 2009, and the market should see another upswing similar to those in the past. In the mean time, all semiconductor companies will suffer from low earnings, and will cut capital spending.  These cuts will result in a late 2009 shortage that should last through 2010.  This shortage will drive higher prices and improved profitability.

Analysis: The cited article for this piece does not seem to account for supply side dynamics, yet Objective Analysis has found that the supply side is the single most important factor governing the revenues and earnings of any semiconductor company - When supply is tight, prices stabilize while costs continually declines.  This drives improving margins and, in turn, higher levels of capital spending.  Once this capital spending begets higher manufacturing levels, an overcapacity results, and prices rapidly crash to cost.

There a forecasting method called the "Boo-Ray" approach: When the market's down, make your forecast call for eternal bad times, but when the market is good, then change the forecast to show that no wrong can ever happen.  This appears to be the case with the forecast in question: A bad start to 2008 implies that the market has changed, that there is nothing to drive demand, and that semiconductors will never again see the kind of growth they experienced only a few months before.  When one looks at the underlying numbers like unit shipments or DRAM or NAND gigabyte shipments it becomes quite clear that these have not slackened, and that demand is relatively stable.  Semiconductor revenues suffer from price crashes even during times of stable demand, and such price crashes are the result of excessive capital spending made during profitable times.

All this is spelled out in detain in a very brief and simple analysis entitled: 2008: Tough Year Ahead, which can be ordered from http://www.Objective-Analysis.com/Reports. This 4-page report explains how and why capital spending impacts the fate of semiconductor revenues and proves the point with two decades of statistics that illustrate the tight coupling between semiconductor capital spending and price collapses.