Chips: Inventory Restocking–Or A Real Bottom?

Chip stocks are suddenly on a ferocious tear: the SMH, the semiconductor HOLDRs, have rallied 16 percent in six days. There’s a spreading view that semiconductor demand may have hit bottom.

But not everyone is convinced.

Auriga USA analyst Daniel Berenbaum this morning asserted in a research note that “the recent rush to call the bottom in semiconductor stocks is based largely on supply-side data that effectively ignores continued deterioration in demand.” Berenbaum thinks the SOX, the widely tracked semiconductor stock index, will eventually return to its November lows in the 170 range. The index closed today at 220.91.

Even Berenbaum concedes that data points from the supply chain are “incrementally positive,” with business in the semiconductor manufacturing chain improving sequentially in both February and March. But he contends that “this increased activity is being driven almost entirely by inventory restocking from low absolute levels, and not a pick-up in demand. ” He notes that there have been shortages in a few categories, in particular power management chips and LCD drivers, but adds that “even here, visibility seems to extend a few weeks at most.” Berenbaum notes that utilization at wafer fabs has picked up, but that one-third of foundry capacity remains idled.

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