Wednesday, June 29, 2011

Linear Forecasting

Following the post I made about the downturn in Semico’s Inflection Point Indicator I received a forecast presentation from Mike Cowan. If you don’t know, Mike produces a linear regression analysis (LRA) of data released by the WSTS (World Semiconductor Trade Statistics). Over the last six, seven years he’s been quoted in many of the industry trade rags. Typically when I write something about a forecast he makes sure I know that he’s out there by sending his take.

"Hi Carl - I saw your posting entitled "Semis: A Bad Year Ahead?" (dated 6-23-11) at the following URL =

In your posting I noted you invoked the boldness of Semico in "Predicting all the way through the first few months of next year ......"

Therefore, I thought that I would "dazzle" you with my boldness per the following "quantitative" predictions of global semi sales as derived from the application of the Cowan LRA forecasting model. See the write below and the attached PowerPoint file for my "boldness"!!!

All righty then Mike….. Have a go! The more the merrier!

Before we get to the forecast some color is in order. When one uses "total semiconductor sales" they include categories like optoelectronics, sensors and discretes. I mention this because some of the industry forecasters exclude these and focus on the Integrated Circuit (IC) portion of the WSTS report. They do this because it has an impact on those who want to model capital spending as a percent of sales. Many believe it is more accurate to use IC sales only when modeling the cap-spending ratio.

Okay, LRA stuff… I really don’t have a problem with the methodology – it’s purely mathematical and it adjusts on the fly. You put the latest numbers in each month and out comes a projection for the next month and the next year. Setting up some ranges for the next monthly release allows you to build a scenarios for the year. Pretty straightforward stuff.

Here's a table detailing current projections (click for full size):

Mike provided his thoughts:

"Therefore, as the above scenario analysis table lays out, depending on the actual WSTS (to-be-released) May 2011 global semi sales number, the forecasted year 2011 sales estimate as determined by the model could vary between a low of $317.947 billion and a high of $325.778 billion. The corresponding 2010 to 2011 sales growth forecast estimate would then vary between 6.6% and 9.2%, respectively. "

"Note - last month's previously published Cowan LRA Model's sales growth forecast estimate for 2011, which was based upon April 2011's 'actual' sales (of $23.519 billion), came in at (plus) 8.0 percent based upon the model's 2011 sales forecast estimate of $322.328 billion as shown in the table immediately below."

Here's that table (click for full size):

You can find many of Mike's past monthly forecast reports on the WeSRCH website (URL = Type "Cowan LRA" in the search box and they will pop up.

I suppose if you want to win the annual semiconductor forecasting trophy (is there one?) or do some quantitative (only) business planning this could be a useful model. Seems to me that if the projections were more focused – like on a specific category, say, NAND Flash, they might be even more useful.

To each his own…..

Tuesday, June 28, 2011

June Rumor Mill

Received another message from an industry friend linking to a story about Apple moving away from Samsung to Taiwan Semiconductor. I know, that’s really not new news - the story has been floating around for a while. In the last few weeks it has become more visible when you pin it alongside the patent squabbles.

Rumor: Apple Moving from Samsung to TSMC for A6 Chips

Apple's choice of device manufacturing partners seems to gather all the attention these days but when you dig around a bit you find that others are making significant headway.

It’s worth noting the progress at Texas Instruments. TI’s OMAP processor appears to be winning some nice business. Last week a story hit the modern InterTubes saying that they took RIM's (Research in Motion) phone business from Marvell:

Marvell Loses its Blackberry Contract

And…. One month ago it was noted on the same site that TI was favored for the development of Google's Ice Cream Sandwich OS:

Android Ice Cream Sandwich Optimized for Texas Instruments

It gets really interesting when you pile one more story (rumor) on top. Will TI sell their OMAP division to Intel? That would be the story of the year. Two references:

Hot Rumor: Intel Interested in Buying Texas Instruments' OMAP Unit?

And a story from today…..
TI's Mobile Streak: Intel Might Like It

Seems to me that could be quite a deal. Intel has the baseband business they acquired from Infineon and that fits with OMAP so it does make some sense. Intel desperately wants to get in on the mobile frenzy and by many counts TI wants to stay focused on Analog. If Intel is interested, they might want to get a deal done soon. OMAP is gaining a lot of traction in the market.

Thursday, June 23, 2011

Semis: A Bad Year Ahead?

Yesterday, prior to the release of Micron's earnings report (the stock is getting clobbered in the after hour session), semiconductor industry research house Semico was quoted in this article on the Electro IQ website:

Semiconductors Weak Through 2012, Semico Predicts

"Semico expects H2 2011 and early 2012 to bring a weak semiconductor market, as the Semico inflection point indicator (IPI) has been steadily declining since May 2010. In August 2010, the Semico inflection point indicator (IPI) index experienced its first drop since December 2009."

There's more at the link -- a chart of their inflection point indicator (IPI) and some comments about the potential for an inventory build.

Predicting all the way through the first few months of next year is pretty bold. Semico is brave enough to even go a bit farther and suggest that the industry will experience an uptick in the second half of 2012. I'm certain they will be attending Semicon West and more than likely they will provide an update. I'm definitely going to have an ear to the ground.

If these analysts are right and the second half of the year does turn out weak great bargains be available in the PC, notebook, smartphone and tablet categories. Unfortunately this probably does not mean great things for the stocks. If you are an electronics consumer you might want to be aware that discount prices for these digital widgets (dwidgetals) will soon come to a store near you.

The Policy Dart Board: Solar? Wind? Both?

Should New York be installing solar panels or wind turbines on their bridges and skyscrapers? Maybe both - policymakers are studying studies <ahem>.

When will they make up their minds?

Here are a couple of relevant stories:

Mapping Sun’s Potential to Power New York
MIREYA NAVARRO | NY Times | June 16, 2011

Two-thirds of New York’s buildings are suitable for solar panels, which together could meet half of the city’s power demand at peak times, the city found.

Going back a couple of years we find this story about Wind power:

[NY City]: Bloomberg Offers Windmill Power Plan
Michael Barbara | NY Times | Aug 19 2008

Mayor Michael R. Bloomberg is seeking to put wind turbines on New York City’s bridges and skyscrapers and in its waters as part of a push to develop renewable energy.

"... eyeing the generally windy coast off Queens, Brooklyn and Long Island for turbines that could generate 10 percent of the city’s electricity needs within 10 years."

It will be interesting to see how the budgets for these initiatives evolve. Speaking of Public Policy, I've got some serious homework to do over the next few weeks. In mid-July I will be the Moderator for this PV session during Semicon West :

PV Public Policy: Working with Federal, State and Local Government

"This session provides a comprehensive overview of current U.S. government initiatives in support of PV on the federal, state and local levels. Participants will hear from government officials and industry stakeholders, on specific approaches to help pave the way for solar energy success in the U.S. "

While it will be nice to participate in this discussion and hear some "specific approaches" my studies suggest that "policy" is all over the map and needs a lot of work to make solar energy or for that matter any alt-energy solution, a (large) success in the U.S. . Sure, there will continue to be uptake and the industry is going to grow for the foreseeable future but are we really enjoying success?

What questions would you be asking these people if you were the Moderator of this session? Do you think the strategies will be clear and the economics well understood?

Saturday, June 18, 2011

Blogging @ Forbes

In addition to the e-mails that are sent to our Advisory clients, we're doing some blogging over at Forbes:

Come on over and check things out.  Your inputs are welcome and expected!

Tuesday, June 07, 2011

Tech Stock Investing Rules Revisited

A reminder as we enter the dog days of Summer....

A couple of years ago JP Morgan semiconductor analyst Chris Danely served up ten rules for investing in technology/semiconductor stocks:

All I could think at the time was, "Wow! Talk about great fodder."

Here's what I wrote (with a few additions):

After discussing this list with several investment friends I thought it would be fun to pitch in a few comments along with a few more insights. As you read this please note my comments are in bold, italicized letters (except for the stuff at the bottom). Just so you know, no holds were barred in the production of this message.

And here we go:

1. Don’t ever Buy or Sell a tech stock based on valuation. Tech stocks are still largely momentum investments. They go up if the estimates are going to go higher and go down if the estimates are going lower and seem “cheap” prior to a blow up, and “expensive” prior to a run up.

- Technology stocks, when they fall from favor, trade on valuation. Sadly those valuations tend to be very, very low. With the demise of the hedge funds the above strategy may be mitigated.

2. Exchanging higher revenue growth for lower margins never works. The reason many tech companies have such high multiples is the high margins and high cash flow they generate. When margins go down, multiples go down, ergo, stock goes down.

— To reiterate; It never works. For most companies lower margins are inevitable as the industry matures.

3. Lead times going out is good. Lead times coming in is bad. These are two occurrences tech companies will deny, deny, and deny ’til the cows come home. They will insist that there is no double ordering when lead times stretch out, even though their customers will openly admit it. They will also try to say their customers will not cancel orders when lead times come in.

— Agreed, although some interesting balance-of-power issues have surfaced as the food chain has required the semiconductor vendors to hold more inventory.

4. Very rarely is “it’s different this time” a good rationale for investing in tech stocks. I can’t count how many times I’ve heard: “Inventory is better managed” or “Our biggest customer just blew up, but we’re fine.” In over a decade of covering tech stocks, VERY RARELY is it different this time. The reason? Human nature is difficult to change.

— Except it is really different when the world goes into a credit crunch.

5. Technology company management is ALWAYS bullish. Tech company managements are often founders; they work very hard, and have a huge amount of skin in the game. The company is their “baby.” Case in point, my mom still loves me after I put her through hell and beyond for the first 25 years of my life.

— Yes, pathologically so.

6. “Looking through a tough quarter or two” never works. When a tech company blows up, the negative estimate revisions are usually much greater than anticipated.

— Looking through a tough quarter or two refers to the hopes of the analyst with a buy on a stock that is sinking. It also shines a spotlight on the diminishing propects of a bonus in quarter or two.

7. Intel stock usually follows its gross margins. I have charted this axiom of semi investing back almost 20 years, and it still works.

— Why? Because with huge capital intensity, small changes in revenues and profits are amplified due to the fixed costs of depreciation and amortization. (Tick-Tock)

8. When a technology company says, “Our revenue growth will come from the Medical or Healthcare end markets,” what they’re really trying to say is, “We have no revenue growth.” While electronic content is increasing in both applications, the number of units are tiny compared to cell phones or PCs.

— Yes. The only exception is if they mean they are selling drugs.

9. It’s never “just a one-quarter problem.” When a tech company blows up sometimes you hear, “its just a one-quarter problem. Business will be back to normal soon.” Technology stock corrections are at least two, if not three quarters of sequential declines, even worse when share loss is involved.

— The one quarter problem is more usually spoken by the analysts and not company management. See #6 as to why.

10. If a tech company either has or supplies into a hot-selling product, consensus estimates are usually way too low (Apple is a prime example). Product cycles never cease to amaze me at how strong they are and how many people will buy the truly revolutionary products such as iPods, cell phones, BlackBerrys and digital TVs.

— Yes, sort of. Estimates are often too low but beware of customer concentration. When that product comes off its growth trajectory, or the client finds a lesser cost supplier, you will find you need a corollary to further define that ditty.


And just for kicks, here are a few more that could be added to a technology investors toolbox:

11. For an analyst it is normal and expected to be, “Seldom right but never in doubt.”

12. When in doubt about issuing a recommendation err on the side of a buy. This is the sell-side credo of professional longevity.

13. In a cyclical industry, it is difficult to be faulted by positing, “It’s never too early to buy.”

14. Management can give accurate guidance in an up cycle because the selling funnel is a good leading indicator and production can be efficiently planned for.

15. Management is lousy with guidance in a down cycle; salespersons are optimistic by nature and thus move from excellent to poor indicators without notice. Management, driven by stock options, are loathe to admit a downturn and slow to take corrective action.

16. Management, as a matter of policy, will let the Street tell them it’s a downturn.

17. Charges and write-offs do wonders for future earnings.

18. Stocks seldom recover from the $5/share line-of-death. Those that do make for very rich returns. Gamblers’ dilemma.

19. Watch asset management metrics like inventory, receivables and payables. They give good clues to the ability of management.

20. Few companies can grow at rates above 10% or 15% for very long.

21. Compare cash generation with earnings. Disparities are telltales.

22. Competitors will give you more information about the soft-under belly of subject company than company management.

23. Most analysts have some value, and no analyst has it right all the time. Think, reason, and extract value from those selective strengths.

24. Inside information is illegal. It is also an excellent source.

25. Talk to customers and customers’ customers.

26. Ask the analyst how they derived their estimates. What drives revenues and margins? How does the company outperform GDP?

27. Ask the analyst what they know that the Street doesn’t.

28. Technology M&A is rife with problems. It is almost always bad for the predator and good for the prey. (In most instances the "A" stands for "Attrition")

29. Know what the M&A motivations are. Expanding into new markets can foretell that management is concerned about current market.

30. Technology companies that are doing extraordinarily well are subject to rapid turns in performance. Do not become complacent.

31. The business is about relationships. Smart, informed people are good sources no matter where they are. These people can be surprisingly helpful long after they leave a researched company. And even if they are no longer connected, friends are good for the soul.


Your comments/inputs to this list are more than welcome.

Monday, June 06, 2011

Cisco Beat Down

Last week Cisco released their latest VNI (Visual Networking Index) forecast.

A nice summary can be found in two articles over at the Lightwave website. In the first, titled

"Cisco: Video among drivers for 4X Internet traffic increase by 2015" we find this summary:

The latest VNI forecast cites four factors, including the video user increase, for the significant escalation in Internet traffic:

  1. The number of connected devices will skyrocket. In fact, at nearly 15 billion, the number of devices connected via the Internet in 2015 will be twice that of the Earth’s population.

  2. Which is not to say people will use the Internet less. Cisco foresees the number of Internet users will grow to nearly 3 billion by 2015. This figure represents more than 40 percent of the world's projected population.

  3. Broadband data rates will increase. Cisco expects fixed broadband rates, such as those available via FTTH, to increase 4X, from 7 Mbps in 2010 to 28 Mbps in 2015.

  4. As the number of online video users increases from 1 billion in 2010 to approximately 1.5 billion by 2015, 1 million video minutes will cross the Internet every second, according to Cisco.

The same author in an article titled "The future according to Cisco", provides some of the longer term predictions:

  • Global IP traffic is expected to reach 80.5 exabytes per month by 2015.

  • Cisco's projected increase in Internet traffic between 2014 and 2015 is 200 exabytes. That's more exabytes than the total traffic for 2010.

  • The 245 terabytes per second transmitted traffic average in 2015 is equivalent to 200 million people streaming an HD movie (1.2 Mbps) simultaneously every day.

  • In 2010, PCs generated 97 percent of consumer Internet traffic. This will fall to 87 percent by 2015 as more connected devices come online.

  • In 2015, 10 percent of global consumer Internet traffic and 18 percent of Internet video traffic will be consumed via TVs.

  • Global mobile Internet data traffic will increase 26X by 2015, to 6.3 exabytes per month (75 exabytes annually).

  • Business IP video conferencing will grow 6X -- more than 2X as fast as overall business IP traffic, at a CAGR of 41 percent from 2010 to 2015. (And, yes, Cisco provides telepresence equipment.)

I'd be careful with these stats. Consider the source. And along with that, I'll say that predicting anything network -related out much farther than 12 months should, at best, be labeled a dubious proposition.

Shares of Cisco and other networkers have been weak for what seems like forever. Once the darlings of Wall Street (you probably remember those days) they have been banished to the woodshed.

What happens to a company when they go in to a funk like this? The stock price languishes, the CEO' s feet get put the fire and Bloomberg, of all places, starts to write hate stories:

"Cisco Rivals Woo Users With Price Cuts, Less ‘Intimidation’"

Correct me if I am wrong but I don't recall Bloomberg writing stories like this in the past. This reads more like something you would find on the Huffington Post.

Over the weekend the San Jose Mercury News chipped in with a story that took a shot at CEO John Chambers. Several analysts chipped in (with the usual strategies) ways Cisco can turn itself around:

"Cisco's stumble: Did CEO John Chambers underestimate Silicon Valley rivals?"

Notable: "Cisco's share of global switch sales fell from 74.3 percent a year ago to 68.5 percent in the first quarter of 2011, while HP, Juniper and Brocade increased their portions, according to researchers at Dell'Oro Group."

And this:

"Many analysts believe the company lost that focus as it expanded into a host of other businesses. Some have also blamed Chambers' reliance on interdepartmental "councils" and "boards" to steer new initiatives. Critics say the unwieldy structure hindered Cisco's response when rivals began selling switches with lower prices and improved features."

Will comments like these push management toward the light? Surely they are listening. Cisco is a big ship and it is going to take them longer than just a few quarters to turn things around. Those that are invested in shares should prepare to exercise a great deal of patience as the flushing takes place.

Speaking of quarters, my friend Pip Coburn over at Coburn Ventures had this to say last week in a discussion about Cisco and Wall Street's infatuation with companies that "beat the numbers":

Wall street rewards companies that play the stupid quarterly key performance indicator game because it is lowest common denominator -- it takes ZERO thought... They "made" or "missed"... Reward/punish, play again...

SHAME on boards of companies if they don't see the paradigm and stay clear of it and there ARE many companies that DO avoid merely becoming a series of key performance indicator tactics masquerading as "strategy".

Congrats to Cisco for waking up - (my add here - have they really woken up?)

They (Cisco) may find that they need a fresh start with "investors" and there may be a period during which ALL the old investors have to be flushed out and the right new matches must be steadily made... Kinda like a juvenile drug addict being told he has to give up his old "friends" and find new ones. The old "friends" weren't really friends but rather facilitators of the addiction.

I couldn't agree more…….

Wednesday, June 01, 2011

Beware! Cell Phones, Coffee, Pickled Vegetables

This story really made the rounds yesterday. Here's an excerpt from a Financial Post article:

“After reviewing the available scientific evidence, it is significant that IARC (The International Agency for Research on Cancer) has concluded that RF electromagnetic fields are not a definite nor a probable human carcinogen. Rather, IARC has only concluded that it may still be possible that RF fields are carcinogenic and has identified areas for further research”, said Michael Milligan, Secretary General of the Mobile Manufacturers Forum (MMF).

“IARC have only assessed the possibility of risk not the likelihood of risk in normal use. Their assessment will now be considered by health authorities who will determine its overall impact” Mr. Milligan continued......

The rest of it is here:

Mobile manufacturers respond to IARC Classification of RF energy.

Yes, there's a possibility so we can't rule it out - that seems to be what they are saying. Certainly there will be more details released about this in the coming days.

What is really odd is that cell phone risk was placed in category 2B. That category includes 266 other carcinogenic agents including coffee and pickled vegetables.

Ya gotta love it.