Bapcha's Stocks. The best insights into Silicon Valley & bio/pharma stocks, companies and their management.

There is a serious over-supply of chips.  There is a tremendous over-supply of Silicon [wafers].  Yet, there are some bright spots.  The spot market was hot – the week of Christmas, but the up-trend was NOT confirmed by long-term pricing of Flash and DRAM memories. Solar has for sure hit the skids, and it does not make any sense to install solar – if you are a business or a homeowner – unless of course, you live in California or Hawaii – where rates can easily exceed 38c/KWH on a sunny weekday after-noon, and the state is still willingly paying $1.55/watt for your solar power generation system which should cost a lot less than what I got as quotes from four of the largest names in solar.

When I tell them that there is an over-supply of panels, these guys just want to stick to script and convince you that it really is worth your while for the state/feds to pick up the tab – for an overpriced system that will not supply electricity when the  grid is down [even when there is ample power generated by your system]. So, the worst company to buy into now is MEMC Electronic Materials – for they sell silicon wafers – that need a lot of energy to manufacture. Which gets us to the best semiconductor company at the current quote – nVidia. My reasons for buying this graphics chip-maker is many-fold:

a. Excellent Management.

b. Decent gross margins.

c. One-time screw-up in the design/manufacturing chain that is now behind NVDA.

d. And this statement from their latest 10Q “During the three months ended October 26, 2008, we entered into a structured share repurchase transaction to repurchase 23.1 million shares for $299.7 million, which we recorded on the trade date of the transaction”.   Not too bad – a company that is doing what they promised to – at least a quarter of the way there.

Pick #2 is SanDisk.

Sure, the stock has run up a little in the last week of december and the first two days of Jan, but this is one solid memory company that will survive the down-turn.  Moreover, SanDisk, and their partner in crime – Toshiba have taken the necessary steps to shut down part of their manufacturing in order to squeeze supplies.  Moreover, the semiconductor industry as a whole is shuttering 30% of its capacity before the end of Feb 2009. 

Reasons for liking SanDisk.

a. Excellent management – who are still stake-holders in the business [though not as much as they held a few years ago].

b. Has access to capacity when the market turns.

c. WIll have gross margins back in the black in the next two quarters.

d. And most importantly, their $400 Million/year royalty stream – which the market is signaling, that they renegotiated with SamSung in the last weeks of Dec 2008 – on which SNDK spends little if any $$$$ generating [except litigation or the threat thereof once every few years].

Pick #3 is Applied Materials.

Applied is the #1 manufacturer of semiconductor manufacturing equipment, and diversified into making machines that are necessary for the manufacture of flat panels and solar cells. With a hand in every possible use of semiconductor technology, a pristine balance sheet, and a stock that has under-performed the market since the internet boom, it is high-time that AMAT led the semiconductor back to good health – like it used to in the 1980′s and 1990′s [they are still big enough, their products, pervasive enough, and the company's financial health is better than ever].

Reasons why I like Applied….

a. Pristine balance sheet.

b. Participates in all semiconductor manufacturing – including chips, solar and flat-panel manufacture. In fact, they even supply technology to thin-film solar companies.

c. Should lead the sector up – after this down-turn.

Pick #4 is SunPower.

The reasons for my liking SunPower have not changed since a prior article of mine.  I sincerely believe that SPWRB can survive with or without subsidies – as they make the most efficient panels, and are an integrated solar supplier.  I prefer SPWRB over SPWRA – since the B shares have eight votes per share, and in a realistic market, should be worth more than the A shares – which have a vote per share.  The reason why the A’s are deemed more dear is because of the fact that the A’s are option-able, while the B’s are not. 

This is silly, and I know hedge funds that are short the A’s and long the B’s – counting on the spread between the A’s and the B’s to shrink/disappear.

Anyway, the four semis worth owning for 2009 are: NVDA, SNDK, AMAT and SPWRB.

© Bapcha’s Stocks, Jan 2009.

Disclaimers:

No positions in all stocks.