Goldman Sachs has recommended to investors not to listen to doomsayers of chip equipment shares, and suggests taking advantage of recent sharp falls to increase positions in the sector.
In their opinion, the level of investment in equipment is still very low, and even if investment grows 60% this year, it will only reach a level which is still 35% below the previous records. In their opinion, in contrast to that of Citigroup analysts, equipment maker shares will reach a peak when the pace of orders reaches a peak, and they don't see that happening until at least 2011.
Specifically, Goldman Sachs explains that investment in DRAM memory, found in all types of computers, fell to $4 billion last year, the lowest level in the past 15 years. Only a rise to $15 billion will bring the sector to a peak. For NAND memories, found in media players, mobile phones, and computers, they claim that just the expected wave of orders for SSD drives demands huge investments of $20 billion.
While Goldman Sachs recommends shares of leaders in chip equipment and inspection sectors, such as Applied Materials (Nasdaq: AMAT) and Lam Research (Nasdaq: LRCX), I recommend here to increase positions in two small Israeli companies that I recently added to my portfolio tracked by "Globes" - Camtek Ltd. (Nasdaq: CAMT; TASE:CAMT) and Nova Measuring Instruments Ltd. (Nasdaq:NVMI; TASE:NVMI).
Both focus on inspection and specialized measurements, and in the latest correction fell hard, which in my opinion created again a very attractive entry price, even if not at the level of mid-2009.
The orders backlog at both firms has grown a lot recently, but it will grow even more over the coming years, for precisely the reasons that Goldman Sachs pointed out about the potential for investments in memory chip production lines and massive investment in other lines as well.
For Nova, which will report next month, independent analyst Amnon Portugaly estimates that fourth quarter revenue jumped above $15 million, and net profit reached over $3 million, compared with $11.4 million revenue and $1.7 million net profit in the third quarter.
Camtek specialized in recent years specifically on complicated inspections at production lines for LED chips, a relatively new sector which will be, in the next decade, the basis for a growing switch to lighting based on clean energy. Today, LED chips are found more and more in applications for outdoor lighting, billboards, cars, and as the lighting source behind flat screen televisions and computer monitors. According to analysts, the outdoor lighting sector specifically is forecast to grow at a 28% annual pace in coming years.
One of the world's largest producers to focus on LED chip production, primarily for outdoor lighting, is US company Cree (Nasdaq: CREE). Last week, Cree soundly beat market expectations and its shares rose to $60, about three times as much as the year before. According to the multiples at which it trades, about ten times sales (of the previous 12 months) it can be understood that investors are confident that LED is one of the biggest things in terms of growth potential in the chip sector over coming years.
As far as I know from industry sources, Cree has conducted its LED chip inspections in the past two years nearly exclusively with Camtek's advanced equipment, after rival KLA-Tencor (Nasdaq: KLAC) did not succeed in providing good solutions.
In the past year, Cree raised over $400 million, and analysts believe about $250 million of that sum is for building a new facility in China as early as this year, and it is reasonable to assume that Camtek will be among the big beneficiaries of that investment.
In the LED industry, in addition to Cree, it is known in the market that another Camtek customer in the memory and photographic chip market, Samsung, is aiming to become number one in LED chips in the coming years, as it is now in memory chips. That goal can potentially lead to more orders for Camtek.
Published by Globes [online], Israel business news - www.globes-online.com - on January 26, 2010
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