Sector Overview: Semiconductors

The atmosphere is gloomy in the semiconductor sector: preliminary findings from research firms Gartner and iSuppli show a decline in chip sales of 4.4% and 2%, respectively. Earlier Texas Instruments (TXN) [TI], Broadcom (BRCM), and National Semiconductor Corp. (NSM) cut back their respective outlooks. According to Gartner, 2009 is going to be worse than this year, but there is a silver lining for investors looking to buy: stocks of star performers like Qualcomm (QCOM) and Broadcom are going for very cheap. Let’s take a look.

According to iSuppli, the decline is mainly due to a 16.9% decline in sales of memory integrated circuits (ICs). This is the second consecutive decline in memory IC revenue but the first time that NAND flash memory revenue showed a y-o-y decline of 13%. Samsung (SSDIF.PK), the world’s largest memory IC and NAND flash supplier, the No.2 chipmaker and also a top beneficiary of the 3G iPhone is set for a 9.1% revenue decline for the year, while Hynix slipped to the No.9 spot from No.7 due to a 29.7% drop in revenues. Infineon (IFX), which has four design wins with the 3G iPhone, should see revenue declining 20.8% due to an about 40% revenue decline from the long-ailing Qimonda. Infineon is trading around $1 and its market cap is about $735 million. Yikes!

While Samsung has a diverse portfolio, Micron (MU), which has too much focus on the memory business, is set to see its revenue decline 9.2% and its rank slip one spot to No.16. It is trading around $2 and its market cap is about $1.5 billion.

2008 Rank	Company	2007 Rank	Market Share	Change in Revenue
1	Intel	1	13.1	1.1
2	Samsung	2	6.8	-12.5
3	Toshiba	3	4	-11.1
4	TI	4	3.7	-16.8
5	STM	6	3.7	-3.2
6	Infineon	5	3.1	-20.8
7	Renesas	8	3	-1.9
8	Qualcomm	11	2.5	15
9	Hynix	7	2.4	-29.7
10	NEC	12	2.2	5.3

Source: Gartner

While the memory market is on a downslide, there are some sectors set for healthy growth. These include programmable logic devices (PLDs) with 7.6% revenue growth, optical components with 6.2% growth (of which Samsung is a beneficiary), and microprocessors with 5.7% growth. This sector is led by Intel (INTC). Recent earnings coverage of the company is available here. Intel is trading around $16 with a market cap of about $87 billion.

Now let's take a look at the stronger performers. Wireless semiconductor suppliers have led the pack. Texas Instruments, which is selling its baseband business, has lost out on opportunities in seminconductors and is set for a 16.8% revenue decline. Qualcomm, the leading wireless chip supplier that also tops my Top 10 Semiconductor Stocks list, recently reported a 26% increase in 2008 revenue to $11.14 billion and is set to move up three spots to No.8. Qualcomm has an enviable position in the 3G industry: without a single design win in the 3G iPhone, it was still a major beneficiary due to its IP portfolio and the settlement with Nokia (NOK) has added to its momentum. It is trading at $36 with a $60 billion market cap.

Another standout performer is Broadcom, which is expected to show revenue growth of about 26% versus 19.6% growth from Qualcomm, and move up five places to No.14 (as per iSuppli data). Broadcom recently acquired AMD’s TV chip business and looks set to grow stronger in the recession. It is currently trading around $19, with market cap of about $9.5 billion.

STMicrolectronics' (STM) recent performance has also been noteworthy due to its recently created NXP Wireless JV, and its design wins with Nokia and Ericsson. STM has moved up a spot to No.5, and iSuppli expects combined revenue from STM and NXP to help it achieve 7.1% growth. Recent earnings coverage is available here. The stock is trading around $7 with market cap of about $6.5 billion.

Overall, if you’re considering buying any chip stocks right now, my top picks are Qualcomm and Broadcom.

Disclosure: None

Comments

[bike 05673:]

How could anyone say they have done a study of semi companies without mentioning Triquint TQNT. Growing revenue, huge cash flow, profitable , increasing market share , pristine balance sheet with no debt. And very very cheap?????

2008 Dec 18 08:07 AM