Technology StocksIt's Different This Time!

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From: etchmeister6/16/2010 11:40:20 PM
   of 549
Its not random...Moore's law is actually very predictable - though it can take detours...aluminum versus copper -that's physics ...URI...U=RxI
Intel litho strategy change could propel ASML, says report
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Peter Clarke
EE Times
(06/16/2010 8:01 AM EDT)

LONDON — Lithography equipment vendor ASML Holding NV could achieve 100 percent market share with Intel Corp. at the 22-nm/20-nm manufacturing process technology node, according to analysts at Nomura in London.

The comments came after a visit by analysts to ASML Holdings NV (Veldhoven, The Netherlands) in which they were told that Intel's traditional two-suppler lithography sourcing strategy may be under review.

Under that system Intel typically qualifies two suppliers of scanners and then ramps volume with mainly one supplier, while giving some orders to the number two. This serves to keep pricing keen as Intel is in a position to switch orders to the alternative supplier. However, that qualification process at the leading-edge is becoming too complex and costly and so could be abandoned, the analysts said in a note.

At 32-nm, ASML's rival Nikon won the entire "critical layer" business at Intel, while at the 22-nm it had been expected that ASML and Nikon will split the Intel business (see ASML, Nikon to split Intel lithography business, says analyst).

The ASML management said it is confident that for Intel's next generation process, ASML should have a substantially higher market share, with 50 percent being the minimum and 100 percent being a possibility, the Nomura analysts reported.

Samsung, Toshiba and TSMC are also expected to make key lithography sourcing decisions in 2010, which will set the lithography market landscape for the next 18 to 24 months, Nomura said.

Related links and articles:

Inside Intel's lithography strategy at 22-nm

Analyst: Canon's litho hopes tied to nano-imprint

EUV lithography keeps progressing, keeps slipping

Full chip correction of EUV designs

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To: Jacob Snyder who wrote (12)6/17/2010 10:16:10 PM
From: Cary Salsberg
2 Recommendations   of 549
Hi Jacob,

Thanks for posting.

The Gartner forecast is for 2010 through 2014. I am sure it uses a combination of top down and bottom up forecasting with a caveat that it can not and does not account for unforeseen macroeconomic and geopolitical events. It is a qualitative model expressed in quantitative terms. Models which use historic data to predict are also qualitative. 2015 is interesting for what it might imply about the qualitative model.

Many semiconductor companies have trouble forecasting more than the next quarter. Semi-equip companies have greater visibility because they have and see longer lead times both for equipment and empty fabs. Unfortunately, the guys building the empty fabs and ordering the equipment are the semiconductor companies with the short lead times. I think the whole industry is doing or using Gartner type analysis to augment their limited visibility.

On the semi-equip cycle, you are using factual evidence to draw a conclusion. The conclusion is based on fact, but is not fact. I disagree with your conclusion, but it is an important conclusion and needs to be addressed.

First, there is the all important definition of semi-equip cycles. Semi-equips are capital equipment and sales of capital equipment fall during macro economic down turns. This variation of the cycle will always be with us, always be true. There has been another variation of the semi-equip cycle, one that is generated by the internal dynamics of supply and demand within the industry and which has occurred during macro economic expansions. This is the cycle this thread is suggesting will be different going forward.

The data you referred to is associated with the "Great Recession." It is not surprising that the most severe recession since the Great Depression produced "the lowest trough" and the "greatest increase," but this data doesn't say anything about cycles generated by internal industry dynamics.

Your second point is important, also. Semi sales are at a record, but semi-equip bookings are not close to a record. There is an associated piece of data that is also important. Semi-equip revenue as a percentage of semiconductor revenue has fallen in recent years. Again, I disagree with your characterization, "bad news."

First, one would expect a lag between record semiconductor revenue and record semi-equip orders. Particularly, after a severe downturn and with macro economic problems still in the news, it is only prudent to run fabs at high rates, limit supply to maintain or lift prices, and invest cautiously.

If semiconductor companies have "gained bargaining power," it would be reflected in the semi-equips margins, particularly gross margins. I follow AMAT, ASML, KLAC, and NVLS closely. I am hearing that they will produce record margins at various recovery revenue levels. Also, I have industry forecasts that say record revenues will be attained by AMAT in 2011, 2012, ASML, 2011, 2012, KLAC, 2012, and NVLS 2011, 2012. The years are the companies' fiscal years.

The issue of falling semi-equip capital intensity has been more persistent and needs to be addressed. There are a number of factors, here. Factors which increase semiconductor revenue and which decrease semi-equip revenue.

300mm - The move to 300mm, 12 inch wafers, had a significant impact. Semi-equipment for 300mm was not much more expensive than 200mm equipment and throughput rates were maintained. The revenue per wafer was markedly increased.

Lithography - 193 nanometer lithography has been the tool of record for many nodes on the Moore's Law road map. Now, an immersion version handles critical layers. This has been the longest period without a change in the frequency of the light source. EUV will bring the first big change in a while.

Rational Procurement - At one time, a fab was built and filled at one time. This produced an equipment bonanza for the semi-equips, but over supply for semiconductor producers. Much of the equipment was not used at high rates and their output sold at low oversupply prices. A very bad way to get high capital intensity. More recently, fabs were equipped, one line at a time. This meant that equipment would be used at high rates, supply and demand would stay more closely in balance, and good prices would be received from their output. This produces lower capital intensity, but it is more profitable for the semiconductor makers. This is also better for semi-equip makers because rational procurement minimizes industry generated cycles and allows the semi-equips to maintain a more efficient production model, one with much fewer changes in production capacity.

Efficient equipment and processes - There is competition in the semi-equip industry. One important competitive factor is the cost associated with a process step in wafer fabrication. Another is the throughput at each process step. Equipment vendors continually work on improving these, but don't raise prices when they succeed. They get the business. These improvements increase semiconductor revenue and decrease capital intensity.

Again, this might all be "bad news," but the 4 semi-equips I follow are expecting record revenues and record margins.

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From: Sam Citron6/17/2010 10:25:52 PM
   of 549
Hi Cary,

I haven't been very active lately on SI but have just heard about your new thread.

The discussion seems interesting, but it reminds me a bit of ham radio -- engineers talking to other engineers. This is OK though I'm not an engineer but an investor, and I come here to share ideas about making money -- in other words for the investor side of SI more than the silicon side.

You say it's different this time and if I understand correctly, it's because everyone is now consuming this technology. It has gone mass market. That is obviously true, but it is still not driving great sales gains for pick and shovel manufacturers. Why not may be an interesting question to some, but I am more focused on looking for opportunities wherever they may happen to be, not just in semi-equips or analog semis.

It sounds like you are still mainly concerned with the same 8 companies you were interested in in 2003, 4 of which comprised the 8 that interested you in 1996. But are these really the most interesting companies in the market for making money going forward, or is it merely that you are extremely reluctant to invest in companies that you haven't followed for ten years? I have nothing against your extremely high standards of due diligence In fact I find them laudatory. But I am a top-down investor and only want to be in industries that I think will outperform, and only in their outperformance phase.

You mention the overestimation of demand recently by NAND manufacturers, but it's better late than never. Flesh-eating tablets, I mean flash-eating tablets, have appeared in the nick of time driving SanDisk from 5 to 50 over the past 18 months. AMAT also went from 5 to 50 once, but that was from October 2008 to March 2010, when SNDK went from 3 to 85.

I wonder whether SNDK is an interesting company from your perspective? Does it have sustainable competitive advantages and high barriers to entry? Have you studied it long enough to have formed a serious opinion as to its merits and demerits?


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From: etchmeister6/18/2010 12:07:48 AM
   of 549
Perhaps one should figure out what TAM is for TSV going forward - that would be a meaningful contribution IMHO....

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To: Sam Citron who wrote (15)6/18/2010 12:34:33 AM
From: Cary Salsberg
   of 549
Hi Sam,

Thanks for posting. I am not troubled by the fact that you know me well. I am here to test my ideas. I can think of no more astute examiner. I will cut through the tech talk and get to the bottom line whenever possible.

I have followed SNDK for a number of years. I have a serious opinion. It is selling a commodity semiconductor which requires very high capital expenditures for its fabrication. There will be times, like now, when demand outstrips supply, prices are high, and they have a high EPS. I am not certain if the EPS is translating into high free cash flow, but you can check that.

I will correct your description of my stodginess. 3 of my 8, AMAT, KLAC, and NVLS go back to 1996. 4, ALTR, XLNX, LLTC, MXIM, go back to 1998. 1, ASML, goes back to 2001.

I have a question for you. If I am selling picks and shovels to miners or I am investing in the pick and shovel company, should I be able to tell which miners will strike it rich?

My wife has 3 best friends. One, friends for about 23 years, is married to an AAPL employee and I watched their stock go from 12 to 540 (split price 6 to 270). They struck it rich. I never wanted to buy AAPL and I still don't.

Part of the purpose of this thread will be to give my reasons why those 8 are "really the most interesting companies in the market for making money going forward."

A key issue going forward is your "I think will outperform, and only in their outperformance phase." We will need to quantify "think" and "outperform" to arrive at an expectation of performance." I like "think" to have a high probability and "outperform" a healthy premium to to market's performance. You might want to present the factors you believe support a high probability to outperform.

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From: KMcKlendin6/18/2010 12:41:59 AM
   of 549
With Regards to AMAT, it *is* different this time. They now have multiple large businesses all characterized by thin film nanotechnology.

1. Semi equip. Still the largest segment and the best margins
2. LCD equip. Extremely cyclical and currently on the upswing
3. Solar equip. Thin film (Sunfab) has been a flop, but crystalline silicon is booming. AMAT is the #1 solar equip supplier. Impressive for a company that entered the business 4 years ago.
4. LED equip. AMAT's LED tool has been impending for some time now.
5. Service, automation, software, abatement: For all the above

With the recent severe downturn, the relative proportions of the above businesses fluctuated substantially. And the diversification helped cushion the downturn. Now AMAT is benefiting proportionally less from the upturn, although AMAT's semi equip business is apparently robust.

IMHO AMAT now has a less cyclical business model and will likely outgrow a maturing semi industry.

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To: etchmeister who wrote (16)6/18/2010 12:42:00 AM
From: Cary Salsberg
   of 549
Hi Etch,

Total available market (TAM) for through silicon via (TSV).

The market is small now and growing slowly according to Rick Hill at a recent technology conference.

I think much of the future market is not known yet.

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To: KMcKlendin who wrote (18)6/18/2010 1:51:23 AM
From: Cary Salsberg
   of 549

Thanks for posting.

I am interested in your statement, "a maturing semi industry." In a previous post, I attempted to characterize the aspects of the semi industry that were maturing and those that were not.

Please define what you mean by "a maturing semi industry."


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To: Cary Salsberg who wrote (20)6/18/2010 4:26:54 AM
From: KMcKlendin
   of 549
It's a good point. The "maturation" of the semi industry is a widely held assumption. And it is easy not to think critically about assumptions. In fact when I've been wrong about an investment, it has often been because my assumptions were wrong.

So I'll play the devil's advocate and argue for maturation:

1. The growth rate of semiconductor revenues appears to be declining with time. Even though new high growth technologies are always emerging, the percentage impact is less because of the size of the industry. Using the SIA three month moving average worldwide billings (1) I get an annual growth rate for the 1990s of 14.28% and the 2000s of 4.22%. Since 2000 was the top of the tech bubble I recalculated for 1985-1995 (19.81%) and 1995-2005 (7.60%). The numbers are very noisy but the overall pattern of a decreased annual growth rate appears to hold.

2. There has been industry consolidation with fewer and larger players among the top semiconductor producers (Fab owners) and the top semi equip companies. This is characteristic of a maturing industry.

3. Fundamental metrics of valuation (P/E and P/S ratios) have declined and most players now offer a significant dividend. This is also characteristic of a mature industry.

4. Semi equip capital intensity has also declined, as you noted.

I personally believe that some maturation of the industry, as defined by declining total revenue growth rates, has indeed occurred. However, the bursting of two large bubbles in the 2000s may lead the market to overestimate the maturation in the industry, and undervalue the companies. I think this may be your underlying point. And certainly any subset of the semi industry, such as your PLD companies, may show growth significantly above the overall trend line.


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To: KMcKlendin who wrote (21)6/18/2010 1:06:10 PM
From: Cary Salsberg
   of 549
A mature industry is one that has penetrated its available market to the point where industry growth rates slow to the rate of growth of the available market and the available market growth is similar to macroeconomic growth rates such as the GDP or population growth.

The semiconductor available market keeps expanding, so the industry is not mature. In this context, I will examine your points, which make it seem that the industry has matured.

Revenue is the product of unit volume and price. The semiconductor industry has posted continuously declining prices. This makes price elasticity a very important factor in the semiconductor industry, much more important than for other industries.

Falling semiconductor prices are normally attributable to the "shrinks" at each node along the Moore's Law road map. In the last decade, the move to 12 inch wafers (300mm) also contributed significantly to the decline in unit prices. This combination lowered prices at a faster than normal rate for the industry.

The theory is that lower prices will lead to sufficiently higher volumes and revenue growth will be achieved. Revenue growth was achieved this past decade, but it slowed. There is always a lag between lowering prices and getting the higher volumes due to the lower prices. Semiconductors are not consumed directly. Lower prices must spur innovation and the products that result must spur unit volume growth. That will, by its nature, produce lumpy lags.

If prices fall at a faster rate than normal, volumes lag more and revenue growth rates slow. It is entirely possible that a combination of falling prices returning to a more normal rate and innovation, necessary for higher unit volumes, continuing to be stimulated by the lower prices and playing catch up, will produce a rising industry growth rate. Anecdotal evidence points to more innovation in more markets.

There is consolidation in the industry. I believe it is the result of the maturing of the Moore's Law road map, not declining growth rates in the industry's markets. As the industry moves along the road map, the product improves dramatically, but production becomes very much more difficult and expensive. The process weeds out the weaker players and rewards the stronger. The industry has fewer players, but they are the winners. The combination of growing markets and industry winners should be very attractive to investors.

I discussed reasons for declining industry capital intensity at length. I will add my belief that it was not caused by the industry maturing and it will stop declining and possibly reverse to modestly higher levels. It will not approach historical peak rates.

During this past decade, P/E and P/S have been buffeted by the DOT COM boom and bust, the options expense, the back dating option fiasco, and, most recently, the "Great Recession." Add to this is the irony that everyone knows the industry is cyclical and hardly anyone has taken to the trouble to move beyond the numbers and really examine the dynamics of recent cycles.

The dividend is a big plus. Many of these companies have business models which support high levels of R & D, yet produced plenty of free cash flow which is returned to investors as dividends and stock buy backs.

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