Chip Revival May Suffer From ‘Iraqtic’ Behavior

The chip recovery predicted this year is getting mixed sentiment between trade groups and industry analysts.

Despite predictions of growth of about 21 percent to $169 billion in 2003 by the Semiconductor Industry Association (SIA), analysts with Deutsche Bank Securites say the conflict overseas could give the chip sector a bad case of “Iraqtic Behavior.”

“The last few weeks have demonstrated the high sensitivity of stocks (particularly high beta semiconductor stocks) with respect to shifting perceptions on the execution of the war in Iraq,” Senior Analyst Ben Lynch said in a briefing to investors. “To the extent the coalition succeeds in its war aims, we expect geopolitical sentiment will continue to be a key driver of stocks in the near term.”

After the war, however, the longer term picture becomes fuzzy. With analysts concerned about an excess capacity in the US economy, a rising fiscal deficit, a potential housing market bubble, declining consumer confidence, the spread of SARS and tensions in North Korea.

Signs of trouble have started popping up. SIA’s report card for worldwide semiconductor sales in February totaled $11.8 billion, a 3.3 percent decrease from the $12.2 billion in revenue reported in January.

The San Jose, Calif.-based trade group remained positive on the news, holding firm on its 2003 estimates as well as a 22 percent bump to $206 billion in 2004, with flatter sales at $206 billion in 2005.

Meantime, the financial group is predicting a sluggish recovery with a 70 percent probability. Lynch said the world issues may prove to be benign versus the market’s current expectations, but the firm said it believes the balance of macroeconomic risk remains to the downside

“Our base case scenario is for resolution of the Iraq war to provide some positive impetus to stocks, as well as eliminate some of the uncertainty hindering corporate and consumer decision-making,” Lynch said. “Beyond that, we believe the economy will experience a sluggish recovery, restrained by excess capacity and poor corporate and consumer confidence.”

Whatever the final outcome for sales in 2003, the news is much brighter than a year ago. On a unit volume basis, year-over-year chip sales have continued to rise by double digits for the past ten months, with an average of 25 percent per month from July of 2002 through February of 2003.

SIA said year over year revenue comparisons also remain favorable, as the industry has climbed out of the downturn, with an average 18-20 percent gain over the seven months through February 2003.

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