Chip makers, and investors, have a lot riding on backpacks this fall being filled with new laptops, refurbished computers, smartphones and music players.
This year, perhaps more than others, a strong back-to-school shopping season will be critical for semiconductor makers hoping that early signs of a stabilizing market will continue through the second half of 2009. With business spending on tech still weak, consumer spending - which fell steeply late last year - takes on added importance.If consumers don't show, semiconductor stocks could reverse recent gains in the second half, and chip makers may find themselves with the problem of high inventory levels again as customers slash orders.
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Those hopes are reflected by the gains in the chip makers' stock prices. The Philadelphia Semiconductor Index, or SOX, is up nearly 40% since the beginning of this year, well above the broader Standard & Poor's 500 and tech-heavy Nasdaq Composite, and the index advanced above 300 in late July for the first time since early October.
The surge reflects two investor perceptions: that supply and demand for chips have come back into realignment, and that gadget manufacturers will begin buying more chips in preparation for higher spending on tech products in the back-to-school and holiday shopping seasons.
Quarterly results from chip makers over the past month suggest a return to normal buying patterns from tech manufacturers. While overall revenue is down for chip makers, the traditional seasonal pattern - chip sales building over the course of the year with the bulk of sales occurring in the second half - is emerging following last year's sharp drop-off in the fourth quarter that sent stocks reeling.
For example, both Intel Corp. (INTC) and Texas Instruments Inc. (TXN) posted sequential revenue growth in the second quarter and predicted more of the same in the third quarter. While net income and revenue remain well below last year's levels across the chip sector, the demand patterns suggest that the periods of massive inventory corrections suffered early in the recession have passed.
Meanwhile, a slight drop in the unemployment rate in July also provided hope that the economy is beginning to recover, and that consumers might be able to spend through the second half of the year.
Still, some analysts say the run-up in chips has already accounted for that recovery, meaning stocks would likely stay flat on good news - limiting any gains - while any stumbles on the road to recovery could have investors taking profits and scurrying for safety.
Semiconductor stocks are entering the second half priced optimistically; however, recently, that has led to disappointing finishes. Beginning with 2000, the Philadelphia Semiconductor Index has risen in the second half only three times - 2003, 2005 and 2006. The other six years, the index registered double-digit declines over the final six months.
Averting that fate hangs on the strength of the consumer market, as businesses still cutting costs amid the recession continue to put off tech purchases. Last month, Intel Chief Financial Officer Stacy Smith noted the continued weakness in those segments and said business spending likely won't recover this year.
If that's the case, Intel's better-than-expected outlook for the third quarter, seen as a bellwether for the industry, will rely heavily on the consumer.
Retailers like Best Buy Co. (BBY) and computer makers Hewlett-Packard Co. (HPQ) and Dell Inc. (DELL) will offer the earliest evidence for the strength of the back-to-school season. H-P, the world's largest computer maker, reports third-quarter results Aug. 18, followed by Dell Aug. 27. Best Buy reports its second quarter in September.
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