WALL STREET NOW FOCUSING ON RETURNS, NOT MARKET GROWTH, SAY ISS ANALYSTS
Sarbanes Oxley Rules Will Prove Costly for Small Cap Tech Stocks
Half Moon Bay, Calif., January 12, 2005 -- Wall Street is now focused on returns, not growth, which has major implications for publicly listed semiconductor companies, according to speakers on the third day of SEMI ISS 2005.
“The stock market has become extremely returns-oriented,” said Mike Wishart, a managing director with Goldman Sachs. Device makers have started to think about returns over growth and equipment and materials suppliers will need to start thinking the same way, he explained.
A returns approach also greatly increases a company’s control of its own destiny because it doesn’t have to rely on Wall Street to raise funds. For example, if a device maker can not raise money to build a new wafer fab in time for an upcycle, then it risks being out of the game. “Intel isn’t going to miss a cycle. Samsung isn’t going to miss a cycle,” said Wishart.
The excesses of the dot com bubble, combined with corporate scandals and the Sarbanes Oxley financial accounting legislation, has changed the equities landscape, especially for technology companies. There has been a move away from analysts covering smaller companies, but larger caps such as Applied Materials and KLA-Tencor will still be well covered. “We will generally see less research,” said Wishart, who added that this was a necessary step before research analysts begin to regain credibility after the dot com fiasco.
Corporate life will be harder under Sarbanes Oxley because adherence to the stricter financial reporting rules will amount to a tax averaging $3 million per annum per company, regardless of size. “It will make it less attractive to be a smaller company, and a technology company,” said Wishart.
In the “bulls and bears” panel session, moderated by Novellus Systems CEO Rick Hill, analysts debated whether the equipment industry had matured or still had strong growth opportunities ahead.
Tim Acuri from Citigroup said most of the negative news for the equipment sector was behind it, and pointed out that industry overcapacity was worse in the previous three cycle peaks than it was in the most recent peak. He also said that contrary to the general view, he believes market value is shifting away from device makers to the equipment companies.
John Pitzer from Credit Suisse First Boston said he believes another strong silicon upcycle will occur, but not in 2005. This cycle won’t be driven by a new killer app, rather by increasing penetration of electronics products in India and China. Pitzer also said the chip equipment industry made a mistake by not maintaining pricing leverage during the transition from 200mm to 300mm equipment, and returns suffered as a result.
Mark Fitzgerald from Bank of America said that since the bursting of the dot com bubble, technology growth rates were lower and companies needed to focus on financial performance. “Wall Street is not going to give you access to cheap capital anymore,” he said. Equipment companies need to figure out to add value to their business model and consistently generate cash, he added.
SEMI ISS 2005 concluded at the Ritz Carlton, Half Moon Bay, on January 12. From January 13-14, the venue will host the SEMI Strategic Materials Conference (SMC).
SEMI is a global industry association serving companies that develop and provide manufacturing technology, materials and services to make semiconductors, flat panel displays (FPDs), micro-electromechanical systems (MEMS) and related microelectronics. SEMI maintains offices in Austin, Beijing, Brussels, Hsinchu, Moscow, San Jose (Calif.), Seoul, Singapore, Tokyo, Shanghai and Washington, D.C. For more information, visit SEMI at www.semi.org.