Foundries have seen business continue to improve as inventory restocking drives near-term orders higher. Credit Suisse suggested revenue for the second quarter could be as much as 50% higher at Taiwan Semiconductor. Much of the recent strength seems attributable to China’s stimulus programs – 3G license awards have driven near-term infrastructure spend and coupon-based stimulus has driven consumer electronic purchases (coupons are only good toward purchase of consumer tech). Consequently, volumes are much improved and guidance was particularly conservative heading into the quarter. Skepticism abounds. I suspect end demand will look better in March than it looked in January when companies guided. Expect to hear a number of companies tell you they’ve seen the bottom. We are potentially set up for a continuation of the tech rally.
That said, the sustainable rate of recovery remains very much in question. While valuations are reasonable by historic standards, growth rates have come in substantially and semis are not cheap factoring in stagnant end markets. Sure, Intel may beat by a little this quarter because customers try to get inventories back to in-line with demand. Demand is still lower but it is likely to stabilize along the way. I read a piece that highlighted the fact that you can buy Cisco, Dell, Hewlett Packard and IBM for 10-12* earnings, which is inexpensive by historical standards. Guess what? None of those companies are growing and the economy is decelerating at unprecedented rates.
There is 20 trillion or so in stimulus being thrown at economies worldwide. The burden of proof is on the OEMs here, but the semis are seeing all the strength – and all of the hope imbedded in their stock prices. While I suspect the recovery will be short-lived, I think fighting optimism in absence of hard data to refute it is a path fraught with resistance. I’m trying not to dig in on the short side in tech right now.