Looking Chipper: CES Highlights Dependency on Chip Sector

by: Shlomi Cohen

The announcements from this year's successful Consumer Electronics Show (CES) in Las Vegas helped boost the share price of many technology stocks, and with them the Nasdaq index, which rose 1.9% last week. Apple (NASDAQ:AAPL) led the gains, as it broke another price record.

Analysts said that the show was first and foremost one with many new tablet computers, whose makers hope to join Apple's iPad party this year. Secondly, the show presented new 4G smartphones. Further behind-- in terms of interest they attracted-- were advanced digital TV screens for the home. These included 3D screens, which except for popping the popcorn, strive to do everything to make the home viewing experience just like a movie theater's.

In my opinion, viewing it from afar, it seemed like a show of "chips, gentlemen - chips", because everything there could not exist without sophisticated chips, and many of them, in every product. This is true as well for many products which seem to be outside the world of electronics, like the first electric car ever presented at this show - Ford's (NYSE:F) Focus Electric.

In the chip sector, for an entire year already there are several analysts who are warning investors of the beginning of a negative cycle for the industry, because history shows that every few years the industry moves from growth to a trough, and back, and some analysts marked 2010 as a peak in the growth stage, to be followed by the low points. If the world doesn’t slip into a second recession from China through Europe to the US and then to Brazil, I don’t see the chip sector falling into a trough this year. The unique thing about this year's CES in Las Vegas is that many new product lines presented there are actually relatively new categories, such as tablet computers, which are only at the beginning of their lifecycles.

If we take, for example, SanDisk Corporation (Nasdaq:SNDK) - I am not clear at all how analysts, on average, expect it to have miniscule growth of 9% in revenue, and worse than that - a 14% drop in earnings per share (EPS).

According to an official release by the CES organizers, more than 80 new tablet computers were launched there, and I have not heard of another solution besides NAND flash for data storage in that new category, which should show sales of about 55 million units, according to Goldman Sachs.

Part of those sales will be at the expense of the older category of laptops - but in the popular laptops there are almost no NAND chips, so there won't be any cannibalism-- which is an issue for Intel (NASDAQ:INTC) chips.

Additionally, in the experts' opinion, tablet computer makers-- led by Apple with the next generation of iPads-- will raise the maximum storage capability from 64 gigabytes to 128 gigabytes of internal flash. For those which are not iPads, there is the option of adding on memory with flash cards, a market led by SanDisk.

The word "growth" in connection with 2011 has been used several times by SanDisk's new CEO, who passed his first trial by media fire in Las Vegas, in an interview with CNBC reporter Maria Bartiromo. In response to her question of what can stop the growth of flash, he said that only a global economic crisis, if there would be one, will negatively impact the strong demand in that market.

I assume that in light of the fact that global economic crises come by surprise, we will hear exactly the same cautious optimism from several executives of Israeli companies whose shares I hold here in my portfolio tracked by "Globes", which are connected in one way or another with the world of chips, and that appear in this week's Needham conference - Orbotech Ltd. (Nasdaq:ORBK), Nova Measuring Instruments Ltd. (Nasdaq:NVM), Camtek Ltd. (Nasdaq:CAMT), AudioCodes Ltd. (Nasdaq:AUDC), Ceragon Networks Ltd. (Nasdaq:CRNT), and Mellanox Technologies Ltd. (Nasdaq:MLNX).

Excluding Camtek, which is not exposed enough to US investors, all those companies broke one year records last week. I believe that for all of them, this year will be at worst equal in revenue to the high level of 2010, and at best this year will be another one of strong growth, even compared with 2010.

In my opinion, Camtek's new CEO Roy Porat will succeed this week in interesting investors in his company because of its good results and low valuation, which should lead it to break its 52-week high as well. Camtek has successes in the chip inspection sector, primarily in the LED niche, and in addition, one of the two acquisitions it made during the crisis - buying Sela from Elron, is beginning to yield sales.

Published by Globes [online], Israel business news - www.globes-online.com - on January 11, 2011 Reprinted on Seeking Alpha with permission © Copyright of Globes Publisher Itonut (1983) Ltd. 2010