The same logic that has pushed shares of chipmaker Intel (INTC) down despite record earnings and revenue is pushing up the shares of semiconductor equipment makers
Look what happened on January 14, the day after Intel announced its earnings.
For the day Intel fell by 1%. But shares of chip equipment makers Applied Materials (AMAT) were up 7.5%%, Novellus Systems (NVLS) up 12.3%, KLA Tencor (KLAC) up 3.4%, and ASML Holding (ASML) up 9.5%.
Investors figure, rightly in my opinion, that Intel is in the early stages of a very expensive war to gain traction in the market for the chips that run smart phones and tablet computers. (More on Intel’s current position and strategy in my January 11 sell (http://jubakpicks.com/2011/01/12/sell-intel-intc/ ) We all know how this works from watching Intel demolish the competition in the market for PC chips. Intel will build factory after factory with each generation producing chips that are simultaneously smaller and more powerful as the company uses new technology and new equipment to pack circuits ever closer together.
That was tremendously expensive when the competition was just a relatively small company such as Advanced Micro Devices (AMD). Intel’s pockets were so much deeper that it eventually forced AMD out of the chip manufacturing business completely. (Advanced Micro Devices spun off its chip manufacturing into a stand-alone business.)
This time around the war will be much more expensive because the competition includes equally deep-pocketed companies such as Samsung.
This time we’re talking multiple generations of chips built in multiple generations of new factories using lots and lots of the most expensive new chip making machinery.
The worry is that Intel’s margins will suffer while the war goes on. But you can see why it’s logical to think that the big near-term winner of Intel’s war is going to be the companies that make the chip equipment.
Right now the sector looks over-extended but the war isn’t going to be over in a day or a month. If you’re already in, I’d hold on though any pullback and add to positions. If you’ve been caught on the sidelines, use any dip to get in. My two favorites in the sector are Applied Materials and ASML Holding.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Applied Materials, ASML Holding, and Intel as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/. I’ll have the fund’s portfolio as of the end of December posted in a few days.
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