High school biology class taught me two things - first, teachers have eyes in the back of their heads and second, the term "ecosystem" means that "everything in the natural world is connected." Well, that's saying a lot, yet with no specific meaning. But then there's tech giant Apple (AAPL) which has figured out a way to apply meaning to a term that had been so generic - at least per my understanding. I say this while also appreciating that biologists around the globe will disagree. But nevertheless, the company has essentially adopted the biology term and converted it into billions of dollars on Wall Street and for the companies it graces with its connection.
As the primary driver of the stock market, Apple's ecosystem continues to serve as a catalyst for many other tech companies, but none have shown to be better beneficiaries than the semiconductors. Where Intel (INTC) rode the coattails of Microsoft (MSFT) in the 90s as the rise of the PC soared, Intel surged to new heights as it was "inside" virtually every computer. So it stands to reason that investors should position themselves to the names that are and will continue to be inside the devices that have made Apple so dominant.
When looking at Qualcomm's operations, two things come to mind - first, the company is focused on tackling new markets and secondly, it has a very attractive business model - one that has caused some angst for the competition. The company has the added benefit of being one of the top suppliers of MSM chips for Apple's iPhone and a benefactor of the growing popularity of smart phones, which is projected to grow by 43% this year. That is not even including the increased business that Qualcomm is likely to see from Texas Instruments' decision to forgo the mobile baseband business - an event that will allow Qualcomm to now service the needs of a company such as Nokia (NOK).
With the stock having reached a couple of new 52-week highs of late, I'm beginning to suspect that my attraction to the company is in line with many other investors and I have reason to believe that the success of tech giant Apple has had a considerable positive effect on its sudden appeal. But nevertheless, in the space dominated by other chip names such as Intel and Texas Instruments (TXN), it is hard to suggest that Qualcomm gets the sort of recognition that I think it deserves. Recently, the company released its Q1 2012 earnings results and proved once again why it belongs in the group of the elite. The company reported earnings per share of 97 cents which is up 18% from the year-ago period - well above analyst expectations of 90 cents.
I have grown fonder of Texas Instruments of late for no other reason than the fact that I think it presents the better value. Plus it also helps that the company has appeared to be on a bit of a roll recently - gaining share in markets such as amplifiers, power management and (oh by the way) did I mention it get slots in Apple products? Recently, upon the release of its Q4 and full year earnings results, it was once again time to assess the company's outlook after seemingly making a correct bet. I say this knowing pretty well that the company beat expectations that it had lowered a month prior. The fourth quarter included additional revenue from the acquisition last year of National Semiconductor, which was completed for $6.5 billion.
Analog chip sales, where it leads in the market, continued to account for the majority of the top line and climbed a respectable 7% to $6.4 billion. But it was not the fact that it exceeded those numbers that should excite investors, but the fact that it put forth an outlook that implies that the company should be able to rebound from a disappointing 2011. And several analysts agree and cited the fact that inventory correction within the overall chip industry is now over. For the coming year, analysts are projecting modest sales growth and total sales of nearly $13.9 billion. The consensus earnings projection for 2012 is currently $1.89. This trend may likely pick up by the end of the year leading into 2013.
ARM Holdings (ARMH)
The very first name that I thought of was ARM Holdings. Not only has this once unknown company come out of nowhere to take a chunk out of Intel's market share, but it has also forged huge deals with Microsoft for use of its chip technology in the upcoming release of Windows 8. Furthermore, it is widely known that PCs are losing share while smart phones and tablets are becoming more ubiquitous in both the consumer and corporate environments.
So the question is, why not own a company that produces the technology being used by many smart phone and tablet manufacturers? It's really that simple, and ARM Holdings is now the clear cut answer, given that ARM already owns 75% of the mobile processing market that is only going to grow more in popularity.
To its credit, Nvidia delivered a decent third quarter. In fact, I can say that it was a good quarter considering the fears that I had upon seeing the declines from the likes of Oracle (ORCL) that signaled weakness in technology spending - and to some extent, from Cisco (CSCO) as well. Both firms typically are used as a gauge for monitoring corporate spending habits. As with both ARM and Atmel, Nvidia stands to benefit immensely from Apple's success. The question is, can it make more ground in the tablet and smart phone market? This is the challenge that its management must address.
Nvidia still remains intriguing at this point. While the stock has indeed taken a significant beating for most of 2011, and has hovered near its 52-week low for quite some time, it may be prudent to wait one more quarter until all the dust settles before taking a position. But investors who have a high risk tolerance, and are willing to bet on its ability to secure the type of share required to generate growth from higher margins, may consider it at any point.
As with ARM, there is a case for a company such as Atmel for a lot of the same reasons. The company competes in a wide variety of different markets in the chip industry. The company's products include microcontrollers, programmable logic devices, and a wide range of proprietary system-on-chips and nonvolatile memory chips. The company manufactured about 93% of its own chips in 2007. It sells its products into many different end markets, including communications, consumer electronics, computing, as well as automotive.
Granted, as has been the case for most tech companies, it has had its own fundamental challenges at the onset of the recession. But not all companies succeed in self-improvement to the extent that Atmel has. This modest semiconductor company is a good example of the rewards that can accrue when patient shareholders and committed management intersect. From a fundamental standpoint, Atmel has outpaced its peers over the past several quarters. Its microcontroller business is healthy, and though I have pointed out the benefit of it being a part of Apple's ecosystem, it is worth noting that Atmel is also gaining share in the non-Apple gadget market, as well with its line of maXTouch controllers which basically run the touch-screen interfaces on several devices. Atmel is a buy.