Intel and AMD sneeze, WFR and FORM carried out on gurneys
What an odd day. I wasn't watching the market this morning so didn't see how things played out at the open, but as I sit here now, near the end of the trading day, I am a little bit baffled about the wild movement in two strong semiconductor industry stocks that I own.
Both Formfactor (FORM) and MEMC Electronic Materials (WFR) are down dramatically today. FORM is down about 10%, WFR down about 13% as I type this. Neither company has issued earnings or guidance or, in fact, any news at all.
No, this is a reaction to AMD and Intel and various other semiconductor companies reporting disappointing results or lowered guidance.
And on the face of it, that's reasonable. But when you delve into the reasons for poor results at AMD and Intel, it makes less and less sense that those results should automatically hurt Formfactor or MEMC's businesses.
Formfactor is a semiconductor equipment company -- they sell testing products, specifically patented microspring test wafers that can be used to test semiconductor wafers during the manufacturing process.
They depend on several of the large foundries and manufacturers, including AMD and Intel, as large customers. But their profitability isn't related to the profitability of AMD or Intel, it's related to the number of testing devices and systems they sell.
Each different semiconductor chip design requires a different testing product, and testing is a source of a lot of waste and time lag in manufacturing. So when innovation is driving the industry and the companies are fighting to come up with the next revolutionary product or to speed up their production or improve the efficiency of their assembly processes, it stands to reason that they would require more testing wafers of the most advanced variety, not fewer.
Formfactor is the leading company in this space, and has, to the best of my knowledge, the leading product -- their patents have withstood court challenges, and they seem to have a technological edge on their competition.
On the flip side, everything I hear from AMD and Intel tells me that the problem is not that demand is drying up for their products, or that they're no longer innovating -- the problem is that they're having a price war, which is likely to bring prices down for the end product but, in the longer term, increase demand for those products. The more these two companies innovate and the more they fight to deliver more products faster and more efficiently to salvage their margins, the more they need products like those produced by Formfactor.
So I don't see why Formfactor is going down ... even if there is somewhat of a slowdown in the semiconductor space in general, as the market clearly fears with tough numbers from Broadcom and others, I expect FORM to be largely immune to anything but a dramatic crash in the industry -- as long as demand exists and companies are fighting for market share, Formfactor should be in the catbird's seat.
The situation with MEMC Electronic Materials is somewhat similar, but even simpler.
MEMC sells the raw material that becomes semiconductors -- the machined silicon wafers themselves. For the most part, they depend on overall demand in the industry, across all product lines (not just computer processors like AMD and Intel, but flash for Ipods or control chips for cell phones or any of the myriad of other chips out there).
WFR does not care how much AMD and Intel are charging for their products -- when they look at the results today and see that AMD is reporting lower revenue because of this price war, they should look a little deeper and see that the volume of chips being sold is climbing, it's just AMD's margins that are suffering because they're cutting prices . They still need an increasing number of silicon wafers -- and since WFR is one of a limited number of suppliers in a business that is already charging premium prices because demand is so high, I would expect that they're not going to be very worried unless this price war reaches the point that AMD or Intel might suffer significantly and have to cut production. I don't think we're anywhere near that point right now.
And that's not even considering the other significant influence on MEMC's business -- their other major customers are the solar power companies, and from China to Germany to California demand for solar power is really ramping up, causing some real fights over the limited supply of polysilicon.
No, I don't think WFR or FORM needs to be that worried about an AMD/Intel price war just yet. Maybe there's more to this story today, and I've heard other say that options expiration is causing a lot of this dramatic volatility today. But business-wise, I don't we should worry about FORM and WFR's numbers, which haven't come out yet, not Intel's or AMD's.
When the giants throw rocks at each other there's always a danger that you'll get hit ... but there's also a nice profit to be made in selling rocks.
Both Formfactor (FORM) and MEMC Electronic Materials (WFR) are down dramatically today. FORM is down about 10%, WFR down about 13% as I type this. Neither company has issued earnings or guidance or, in fact, any news at all.
No, this is a reaction to AMD and Intel and various other semiconductor companies reporting disappointing results or lowered guidance.
And on the face of it, that's reasonable. But when you delve into the reasons for poor results at AMD and Intel, it makes less and less sense that those results should automatically hurt Formfactor or MEMC's businesses.
Formfactor is a semiconductor equipment company -- they sell testing products, specifically patented microspring test wafers that can be used to test semiconductor wafers during the manufacturing process.
They depend on several of the large foundries and manufacturers, including AMD and Intel, as large customers. But their profitability isn't related to the profitability of AMD or Intel, it's related to the number of testing devices and systems they sell.
Each different semiconductor chip design requires a different testing product, and testing is a source of a lot of waste and time lag in manufacturing. So when innovation is driving the industry and the companies are fighting to come up with the next revolutionary product or to speed up their production or improve the efficiency of their assembly processes, it stands to reason that they would require more testing wafers of the most advanced variety, not fewer.
Formfactor is the leading company in this space, and has, to the best of my knowledge, the leading product -- their patents have withstood court challenges, and they seem to have a technological edge on their competition.
On the flip side, everything I hear from AMD and Intel tells me that the problem is not that demand is drying up for their products, or that they're no longer innovating -- the problem is that they're having a price war, which is likely to bring prices down for the end product but, in the longer term, increase demand for those products. The more these two companies innovate and the more they fight to deliver more products faster and more efficiently to salvage their margins, the more they need products like those produced by Formfactor.
So I don't see why Formfactor is going down ... even if there is somewhat of a slowdown in the semiconductor space in general, as the market clearly fears with tough numbers from Broadcom and others, I expect FORM to be largely immune to anything but a dramatic crash in the industry -- as long as demand exists and companies are fighting for market share, Formfactor should be in the catbird's seat.
The situation with MEMC Electronic Materials is somewhat similar, but even simpler.
MEMC sells the raw material that becomes semiconductors -- the machined silicon wafers themselves. For the most part, they depend on overall demand in the industry, across all product lines (not just computer processors like AMD and Intel, but flash for Ipods or control chips for cell phones or any of the myriad of other chips out there).
WFR does not care how much AMD and Intel are charging for their products -- when they look at the results today and see that AMD is reporting lower revenue because of this price war, they should look a little deeper and see that the volume of chips being sold is climbing, it's just AMD's margins that are suffering because they're cutting prices . They still need an increasing number of silicon wafers -- and since WFR is one of a limited number of suppliers in a business that is already charging premium prices because demand is so high, I would expect that they're not going to be very worried unless this price war reaches the point that AMD or Intel might suffer significantly and have to cut production. I don't think we're anywhere near that point right now.
And that's not even considering the other significant influence on MEMC's business -- their other major customers are the solar power companies, and from China to Germany to California demand for solar power is really ramping up, causing some real fights over the limited supply of polysilicon.
No, I don't think WFR or FORM needs to be that worried about an AMD/Intel price war just yet. Maybe there's more to this story today, and I've heard other say that options expiration is causing a lot of this dramatic volatility today. But business-wise, I don't we should worry about FORM and WFR's numbers, which haven't come out yet, not Intel's or AMD's.
When the giants throw rocks at each other there's always a danger that you'll get hit ... but there's also a nice profit to be made in selling rocks.
This article posted by One Guy @ 7/21/2006 02:29:00 PM 0 comments
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