I like my chips small and powerfulŠ and with extra greenbacks on the side!
How to use the market collapse to position yourself for exponential growth: Buy this stock for under US$13

by Siu-Yee Ng

Now stop licking your lips. I’m not talking about barbecue chips. These chips don’t fill your belly, but they will make your life easier.

Look around your office. There are computers, telephones, fax machines, printers, etc. You get my point. These are just a few things you can find in your daily life that use chips.

We live in a world full of gadgets, and the first company to come out with a new and improved one has the upper hand in the market… for a few months, that is. The development of the Internet has increased the demand for faster and higher-performance semiconductor devices.

Give me a minute and I’ll tell you how you can take advantage of the current tech slowdown and make money from a beaten-down but profitable company. This month’s IPO play actually debuted over a year ago, but now is the time to buy for the ride up.

Shortened lifespan

The life cycle for chip-driven devices has shrunk from four years in the early 1990s to approximately two years today. The increase in device complexity and reduction in product life cycles have led to a more costly and complex manufacturing process.

What about the dramatic decrease in computer prices in the last few years? Competition is driving prices down. So semiconductor manufacturers need to find a faster and more efficient way to get their products on the market ahead of the competition. A process called control metrology can do just that.

Historically, semiconductor manufacturers have decreased their cost per chip by 25% to 30% every year. They have reduced the feature size, increased the wafer size and increased equipment productivity.

Increasing wafer size and yields will continue to be sources of productivity gains by semiconductor manufacturers; but, increasingly, gains will come from reduced feature size and non-yield manufacturing productivity enhancements, including increased equipment uptime, reduced manufacturing space requirements, reduced use of wafers for testing purposes, and lower tool maintenance costs.

Think about the size of these chips and just imagine the difficulty of testing and implementing the semiconductors on a silicon wafer. The majority of the 100 to 500 steps required to fabricate semiconductors on a silicon wafer involve the deposition and removal of a variety of insulating and conducting thin films.

Ideal measurements

Thin film metrology measures the thickness and material properties of these thin films. This is one of the most important metrology systems utilized at semiconductor fabrication facilities, because it measures a large number of steps. The most widely used technologies to measure the thickness and properties of thin films have historically been reflection spectrometry and ellipsometry.

But these systems have been unable to meet the process control metrology demands of the semiconductor industry. You see, the industry is rapidly moving toward measuring product wafers rather than test wafers.

Think about the money manufacturers could save if they didn’t have to process non-productive test wafers. Not to mention the inadequate control in the manufacturing process using test wafers alone. Measurements on product wafers must be performed in small areas, whereas both spectrometers and ellipsometers generally require fairly large measurement areas.

The demand for improved precision and repeatability requires the ability to measure thicknesses that range from extremely thin films to thicker films. Reflection spectrometers are most suitable for measuring thicker films, whereas ellipsometers are most suitable for measuring very thin films. Thus, neither system alone is capable of accurate and reliable measurements over the full range of film thicknesses.

To make things even more complicated, the industry is now using film stacks composed of several layers of different films, as well as many films whose optical properties are functions of the actual deposition conditions. Spectrometers and ellipsometers alone generate insufficient data to simultaneously determine the thicknesses and properties of these film stacks and new types of films with the precision that semiconductor manufacturers require.

Reflection spectrometers and most ellipsometers have very limited capabilities for such simultaneous measurements of both thickness and optical parameters.

No sharks here

Now, what if there was a way to combine film measurement technologies? Look no more, because Therma-Wave, Inc.’s (TWAV:NASDAQ) Opti-Probe systems can significantly improve upon existing thin film metrology systems by integrating up to five distinct film measurement technologies, three of which are patented by Therma-Wave.

By combining the measured data from these multiple technologies and correlating it with its proprietary software, Opti-Probe systems provide increased measurement capability, which in turn leads to higher yields, less misprocessing, less rework, faster production ramp-up, and increased productivity on both test and product wafers. These techniques of combining optical measurement technologies and correlating the results have also been patented by Therma-Wave.

Therma-Wave’s process control metrology is used to help semiconductor manufacturers monitor process parameters and reduce feature size, increase wafer size, increase equipment productivity and improve device performance.

Its current process control metrology systems are principally used to measure ion implantation and thin film deposition and removal. Therma-Wave currently sells two families of process control metrology systems, called Therma-Probe and Opti-Probe.

Therma-Probe systems use thermal wave technology and are the predominant non-destructive process control metrology systems used to measure the critical ion implantation process on product wafers in the fabrication of semiconductors.

Unlike previous ion implant metrology systems, the Therma-Probe system uses a totally non-contact, non-damaging technology, and thus can be used to monitor product wafers immediately after the ion implantation process. These features have been integrated into an easy-to-use and reliable package with automated wafer handling and statistical data processing.

All in the family

Ion implant metrology is a key step in the fabrication of semiconductor devices where ions—usually boron, phosphorous or arsenic—are implanted into selective areas of the silicon wafer to alter its electrical properties.

Ion implantation is generally performed several times during the early phases of the fabrication cycle. So there’s typically a time lag of several weeks between these implant steps and the first electrical measurements that indicate whether the ion implantation process was properly executed.

Failure to identify improper ion implantation can be extremely costly to a semiconductor manufacturer if the fabrication cycle is permitted to continue. Historically, semiconductor manufacturers used a four-point probe to perform test wafer monitoring, a method that measured electrical resistance and required physical contact between the probe and the silicon wafer surface.

The problem with this method was the high probability of the silicon wafer becoming contaminated from contact with the probe. As compared to test wafer monitoring, product wafer monitoring using Therma-Wave’s Therma-Probe systems decreases manufacturing costs by reducing the need for test wafers and pilot runs, and shortening the cycle time between the implanting and monitoring steps.

And here’s the icing on the cake. Therma-Probe’s tests can detect problems inherent in product wafers that are often missed utilizing test wafer monitoring alone.

Since its introduction, the Therma-Probe system has captured over 50% of the market for ion implant measurement in general and over 95% of the market for non-destructive ion implantation measurement of product wafers.

Opti-Probe systems significantly improve upon existing thin film metrology systems by integrating different measurement technologies and utilizing Therma-Wave’s proprietary optical technologies.

Mo’ money

Therma-Wave makes money from system sales, sales of replacement and spare parts, and service contracts. During the fiscal year that ended March 31, 2001, Therma-Wave derived approximately 90% of its revenues from system sales, 6% from sales of replacement and spare parts, including associated labor, and 4% from service contracts.

During the year ended March 31, 2000, it derived approximately 85% of its revenues from system sales, 9% from sales of replacement and spare parts, including associated labor, and 6% from service contracts.

During the year ended March 31, 1999, it derived approximately 78% of its revenues from system sales, 12% from sales of replacement and spare parts, including associated labor, and 10% from service contracts.

As you can see, revenue from system sales has increased, whereas service contracts and sales of replacement and spare parts have fallen. It’s not surprising to see a decrease in services and parts with the slowdown in tech spending. What I do like seeing is the continuing strength in system sales. We’ll get more into the numbers in a minute.

International sales accounted for approximately 59%, 63% and 69% of total revenues for fiscal 2001, 2000 and 1999, respectively. This is something to keep an eye on. Think about the exchange rate: if the value of the dollar rises compared to other currencies, Therma-Wave may experience a decrease in revenues. But this has not been the case so far.

No fancy talk

Let’s look at the numbers now and see what Therma-Wave is doing in terms of sales. Net revenues increased 71.3% in fiscal 2001 compared to fiscal 2000.

How can this be, when the chip industry has been hit with a slowdown in tech spending? Think about this for a moment.

Despite the slowdown, Intel recently launched its 2-gigahertz Pentium 4 chip. And its rival AMD introduced its new 1-gigahertz Duron chip. Of course, these brought prices down for less powerful chips. My point is that competition continues to drive companies to come out with a faster and better product. It’s survival of the fittest.

Not to mention that conditions have improved in the semiconductor capital equipment industry during fiscal 2001, mostly due to the growth of semiconductor manufacturers and the recovery of economic conditions in the Asia Pacific region.

Of course, with every investment there’s risk. We can’t ignore the fact that IT spending has slowed. And there’s still no sight of a rebound in computer sales. But there is one thing to remember.

Chips are not only used in computers. Think about the electrical instruments used in hospitals and other facilities. Chips are everywhere. So there will always be a need for Therma-Wave’s technology. The question is, will Therma-Wave have enough capital to survive this correction?

Now here’s something that leads me to believe Therma-Wave is here to stay. This company has been around since 1982. And despite the market correction that began in March 2000, the company still managed to increase gross profits 75% from fiscal 2000 to fiscal 2001.

Orders in the pipeline

At March 31, 2001, 2000 and 1999, Therma-Wave’s backlogs were US$57.3 million, US$41.9 million, and US$16.0 million respectively.

Historically, a small number of customers have accounted for a large portion of Therma-Wave’s revenues. For example, during fiscal 1999, sales to Intel Corporation and AMD accounted for approximately 23% and 18% of net revenues, respectively; and sales to its top five customers accounted for approximately 53%.

During fiscal 1998, sales to Intel Corporation accounted for approximately 23% of net revenues, and sales to its top five customers in the aggregate accounted for approximately 45%. This does cause some concern, but Therma-Wave continues to add customers.

What I like about Therma-Wave is its growth potential. Two of its competitors are trading at higher valuations compared to Therma-Wave. KLA-Tencor Corp. (KLAC:NASDAQ) and Veeco Instruments, Inc. (VECO:NASDAQ) have market caps of US$9.048 billion and US$743 million, respectively, compared to Therma-Wave’s US$385 million market cap.

Furthermore, KLA-Tencor has a P/E of 21.50 and a P/S of 4.4. Veeco has a P/E of 24.1 and a P/S of 1.7. Compare this to Therma-Wave’s P/E of only 12.08 and a P/S of 2. You can see why I get excited about Therma-Wave’s growth potential.

Therma-Wave, Inc. debuted on February 4, 2000, at a price of US$20. But with slowing IT spending, the company has been trading steadily between US$10 and US$20 in the last nine months.

Market sentiment has a lot to do with how a stock trades. And today’s sentiment is negative, as we all know. In light of this, I think the stock will pull back to trade under US$13.00. So I’m issuing a buy under US$13.00, while maintaining a 20% stop-loss at US$10.40.