Chipping Away at Novellus

The chips seem to be down for Novellus Systems (Nasdaq: NVLS  ) , and the semiconductor industry as a whole, mainly due to the slowing down in demand for chips used in personal computers.

This is evident from the results California-based Novellus released in October. The company's third-quarter net sales fell 16.5% from the year-earlier period, to $306.7 million, while net income dropped by 33%, to $51.1 million. The lower revenues and income were primarily due to poor demand for the company's chip manufacturing products.

Novellus competitor Applied Materials (Nasdaq: AMAT  ) , whose quarterly results were released in November, also saw revenues dip, by 24% from the previous year's quarter, to $2.18 billion. As you would suspect, this was because of declining orders from solar cell manufacturers and from makers of chips used in electronic displays.

ASM International (Nasdaq: ASMI  ) , whose quarterly results were released in October, saw revenues for its latest quarter rise by 7% from the previous year's quarter, to $505.8 million. However, this was a significantly lower figure compared to the previous quarter's revenue of $688 million. Debt problems in the United States and the eurozone, along with tightening of credit in China, have resulted in a fall in confidence for consumers and corporations alike. And this in turn has led to weaker revenues for companies like ASM.

What now?
Is there light at the end of the tunnel? The answer is a mix of yes and no. The DRAM chip space continues to remain weak coupled with low sales of personal computers in both the U.S. and European markets. But, despite the bad economic situation, consumers' hunger for smartphones, tablets, and ultrabooks have kept things afloat for the semiconductor industry, and has somewhat made up for the fall in PC sales. Moreover, the SSD market seems to be growing as enterprise storage demand ramps up.

Another reason to cheer is the better-than-expected Black Friday sales, which were up 6% to 9% over 2010. Out of these sales, roughly 40% were of electronic goods.

Nevertheless, chip makers don't seem to be celebrating as yet. Recently, chip makers Texas Instruments and Altera Corp. announced a downward revision of their fourth-quarter guidance, citing weak demand due to the worsening economic outlook. The companies said their customers, the ones who use the chips in electronic devices, are still struggling to reduce their inventories.

The same can be said for makers of solar panels, who are witnessing low demand and reeling under the tremendous competition coupled with high panel inventory levels.

The Foolish bottom line
While falling personal computer sales have given the chip industry sleepless nights, the growing demand for smartphones and tablet devices gives a reason to smile. I feel that even if things get worse from here, it would still be a good idea to invest just before the start of an uptrend. However, for the companies predominantly supplying equipment to solar panel makers, the going will continue to be tough.

What do you Fools think about the chip industry? Let us know by leaving your comments in the box below. Don't forget to add Novellus to your watchlist. It's free and lets you stay up to speed on the latest news and analysis for your favorite companies.