The overall semiconductor sector is taking a big hit today, led by the downgrade by Goldman Sachs (NYSE:GS) of Intel Corp. (NASDAQ:INTC), and followed up with rating cuts on Applied Materials (NASDAQ:AMAT) and KLA Tencor (NASDAQ:KLAC).
Interestingly, Lam Research (NASDAQ:LRCX) had its rating boosted by Goldman.
Goldman analyst James Covello asserts that processor shipments will drop in 2011, affecting the outlook of Intel. He sees higher inventory which he identifies from cuts in orders at processor packaging companies.
Covello also see much higher input costs than the Street in general is taking into account. Consensus is at about 5 percent while Covello isse 15 percent being a more realistic number.
Citing 2005 as a model, Covello noted that when capex was up then, the following year selling prices dropped by 11 percent. He believes that will probably happen again in 2012 after heavy spending by Intel.
As for Intel's tablet challenge, he said this:
"Our estimate that Apple has a $60 to $70 cost of materials advantage over competitors given its scale in purchasing commodities such as NAND flash, and Apple’s large installed base of users of its apps store and iTunes, which in conjunction with its cost advantage allows Apple to price tablets aggressively and monetize the device through content sales."
In other words, Apple will own tablets for some time.
For makers of chip equipment, they are expected to slow down in order over the next year-and-a-half. Covello has an overall "Cautious" on the sector after downgrading it to a "Neutral" in the early part of 2011.
He concluded that “the cost to build more wafers is irrelevant for wafers that are not built because customers already have too much capacity.”
Covello lowered his rating on Applied Materials from "Buy" to "Neutral," and for KLAC from "Neutral" to "Sell."
His reason for upgrading Lam from a "Neutral" to "Buy" was because it receives 85 percent of its business from memory chip foundries at any time, which is projected to rise 10 percent over the next year. Lam also doesn't have as much exposure to Intel as Applied and KLA has.
Intel was trading at $23.46, falling $0.42, or 1.76 percent, as of 1:38 PM EDT. Applied Materials was at $14.27, down $0.23, or 1.59 percent. KLA-Tencor Corporation was trading at $41.08, dropping $1.75, or 4.09 percent. Lam Research was at $46.66, down $0.52, or 1.10 percent.
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