* Morgan Stanley downgrades include Xilinx, Micron, Nvidia
* Semiconductor stocks fall
* Warns of signs of inventory build-up
(Adds analyst comments, more background)
By Ian Sherr
SAN FRANCISCO, Nov 3 Shares of Intel Corp
(INTC.O) and other semiconductor makers slid on Tuesday after
Morgan Stanley downgraded the sector, warning that inventory
was creeping up and revenue growth could peak in early 2010.
Morgan Stanley, which downgraded bellwether Intel to
equal-weight from overweight, cast a shadow over growing
optimism among investors and executives that a revival in
corporate and consumer spending would prop up chip sales.
The U.S. investment bank downgraded the U.S. semiconductor
sector to cautious from attractive, saying expectations of a
recovery and forecasts of above-seasonal growth may have
already been factored into stock prices.
"A lot of good news has been baked in," wrote Morgan
Stanley analyst Mark Lipacis. "We can't help but think that PC
component suppliers will have a difficult time beating
expectations for over the next several quarters."
Still, some analysts continue to foresee revenue growth for
chipmakers after stronger-than-expected back-to-school sales,
holding out hope for renewed corporate spending on technology
in the second half of next year.
But others agreed with Morgan Stanley's more pessimistic
assessment, warning that U.S. unemployment may soon rise above
10 percent, depressing consumer sentiment, which has held up
"Did 2009 feel good enough to you that Intel revenue should
only be down 8 percent?" said Auriga analyst Daniel Berenbaum.
"There is an assumption both among investors and at
semiconductor companies that the U.S. consumer will continue to
be OK," he added. "That's a bad assumption."
In terms of a corporate refresh cycle, research group
Gartner says it expects commercial PC sales to rise 10 percent
in 2010 and an additional 13 percent in 2011.
And Intel is expected to profit heavily from it. Wall
Street expects the technology bellwether to show fully reported
earnings per share of $2.81 for fiscal 2010, compared with an
estimated 81 cents for 2009, according to analysts polled by
Thomson Reuters I/B/E/S.
Still, Berenbaum said he is more skeptical. His research
showed corporate PCs to be newer than the oft-repeated four to
five years old. And that, he said, combined with continued
concerns about unemployment, raised questions about growth.
NOT JUST THE UNITED STATES
Other analysts argued that while the United States and
China -- the world's largest and second-largest semiconductor
markets -- are carrying the industry, true global growth has
yet to come back.
"The world customer base is now larger than it's ever been
in its history," said JMP Securities analyst Alex Gauna, adding
that more bearish claims may not take this into consideration.
"I know that the economic recovery is tenuous, but global
growth is still very much a secular trend and an opportunity
for semiconductors," he said.
While inventory levels have been at historically healthy
levels, Morgan Stanley's note said that increased builds ahead
of the holiday shopping season and release of Microsoft Corp's
(MSFT.O) Windows 7 operating system have caused inventory
levels to creep up.
Additionally, Lipacis wrote, the investment bank expects
margins for semiconductor companies to hit their peak in the
Morgan Stanley downgraded chipmakers Altera Corp ALTR.O
and Xilinx Inc (XLNX.O) to equal-weight from overweight, mostly
due to weaker-than-expected international demand, even though
the two companies are expected to benefit from the recovery.
Memory chipmaker Micron Technology Inc MU.N was
downgraded as well to equal-weight from overweight, again due
to the industry-wide inventory and supply concerns.
Graphics and chipset maker Nvidia Corp (NVDA.O) was
downgraded to underweight from equal-weight, primarily because
the company is expected to lose chipset marketshare to Intel,
whose competing products will be cheaper.
Intel shares closed down 2.68 percent at $18.50, Rambus Inc
(RMBS.O), fell 1.25 percent to $15.75, and Nvidia Corp
(NVDA.O), slid 0.5 percent to $12.01. Xilinx finished off 0.92
percent at $21.55, and Altera fell 1.56 percent to $19.61.
However, shares of Intel arch-rival Advanced Micro Devices
Inc AMD.N closed up 0.87 percent at $4.64, and Micron
Technologies rose 1.06 percent to $6.65.
LSI Corp (LSI.N) closed 2.73 percent lower at $4.99.
(Reporting by Ian Sherr; editing by Andre Grenon; Editing by
Carol Bishopric, Gary Hill)